President Obama has nominated Janet Yellen as the next chairman of the Federal Reserve. Much hype has surrounded Yellen since her name appeared on the short list for the chairmanship. Yellen was always Wall Street’s first choice because of her dovish views on inflation. Obama is apparently fond of Yellen too. One of Yellen’s greatest supporters has been Ohio’s Senator Sherrod Brown. In fact, Brown has been pushing for Yellen’s nomination for months. Back in July, Brown wrote a letter to President Obama expressing her qualifications for the chairmanship. The letter stated,
“Yellen . . . identified the impending threats that both the housing bubble and the shadow banking sector posed to our entire economy.”
Oh, if wishing made it so.
If their mythologizing of Yellen is any indicator, we might conclude that had President Obama and Senator Brown been at the 13th-century Battle of Stirling in the film Braveheart, they would have expected a taller William Wallace who would consume the English with fireballs from his eyes. Yellen’s outstanding background is as mythical as the eyes of William Wallace. The reality is that Yellen, like Ben Bernanke, was completely oblivious to the housing bubble and the coming economic crisis. Yellen has a thorough track record of demonstrating her own cluelessness.
During a September 27, 2005 speech in London, Yellen proposed the question of whether the popping of the housing bubble would have a dramatic impact on the American economy. Yellen answered,
“the economy would likely to be able to absorb the shock.”
In a January 22, 2007 speech, Yellen said:
“While the decline in housing activity has been significant and will probably continue for a while longer, I think the concerns we used to hear about the possibility of a devastating collapse—one that might be big enough to cause a recession in the U.S. economy—have been largely allayed.”
During a February 23, 2007 speech, Yellen noted:
“Despite the continued weakness in housing construction, which as I said enters directly into the calculation of real GDP, there are some signs of stabilization in other aspects of housing markets, suggesting that construction activity may level out before too long. For example, home sales have steadied somewhat after falling sharply for a year or so. Considering this in combination with the continued drop in housing starts that I mentioned earlier, it is not surprising to find that inventories of unsold homes have begun to shrink. This development suggests that the process of resolving the imbalances between demand and supply in the housing market may be underway, and, as a result, we could very well see the drag on real GDP from housing construction wane later this year.[…]The bottom line for housing is that the concerns we used to hear about the possibility of a devastating collapse—one that might be big enough to cause a recession in the U.S. economy—while not fully allayed have diminished. Moreover, while the future for housing activity remains uncertain, I think there is a reasonable chance that housing is in the process of stabilizing, which would mean that it would put a considerably smaller drag on the economy going forward.”
Of course, housing plunged soon after Yellen’s February 23, 2007 speech.
The incorrect forecasts in Yellen’s February 23, 2007 speech were not limited to housing, either. In the same speech, Yellen noted:
“Outside of housing and domestic autos, the rest of the economy has been doing quite well; that’s why it might be called a ‘bi-modal’ economy. In other words, it looks as if the economy is pretty close to the ‘glide path’ I mentioned before—since the first quarter of last year, growth has slowed to a bit below most estimates of the economy’s long-run potential, and more recently the risk of an outright downturn has receded along with the early signs of stabilization of housing markets. In summary, I believe that a soft landing is the most likely outcome over the next year or two.”
Yellen’s inaccurate forecasts continued. On July 12, 2007, Yellen predicted:
“So I suspect that the markets and the Committee have become more closely aligned, sharing the view that growth in the U.S. is, and is likely to remain, healthy. In further support of this view, stock market values have risen and implied volatilities have been flat or trended down, as we continue to get stronger news on overall economic growth. Moreover, these developments—robust economic data, rising long-term rates, higher expected policy paths and climbing stock market indexes—are global phenomena, occurring in many industrialized countries. The bottom line for housing from a national perspective is that it has had a significant depressing effect on real GDP growth over the past year. While I wouldn’t want to bet on a sizable upswing, I also wouldn’t be surprised to see it begin to stabilize late this year or next.”
Finally, on December 3, 2007, Yellen again provided a rosy economic forecast:
“To sum up the story on the outlook for real GDP growth, my own view is that, under appropriate monetary policy, the economy is still likely to achieve a relatively smooth adjustment path, with real GDP growth gradually returning to its roughly 2½ percent trend over the next year or so, and the unemployment rate rising only very gradually to just above its 4¾ percent sustainable level.”
But please don’t just rely on my interpretation of Yellen’s statements. Listen to Yellen’s own words. During a 2010 Financial Crisis Inquiry Commission, Yellen admitted,
“For my own part I did not see and did not appreciate what the risks were with securitization, the credit ratings agencies, the shadow banking system, the S.I.V.’s — I didn’t see any of that coming until it happened.”
With Yellen’s nomination now official, the hype of Yellen will only grow in size. The markets will boast about her experience, her credentials, and the fact that she will be the first female Chair. Yet, behind the hype, the reality is that Yellen will be just like her male predecessors. All of them come from the same school of economics. Sitting in their ivory academic towers, they invent various macroeconomic formulas that have no basis in economic reality. The magical ingredient in all of their formulas is simply to print more money. However, unlike the victory that the Scottish achieved at Stirling under Wallace’s lead, Yellen will blindly lead us to economic collapse.
John Langenderfer is a practicing attorney with a focus in consumer and commercial law. He can also be reached on his Facebook page.
All opinions expressed belong solely to their authors and may not be construed as the opinions of other writers or of OCR staff.
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