'Bernanke had his “mortgage credit quality has been very solid…” For Yellen, it’s “evidence shows that reforms since the crisis have made the financial system substantially safer.” If the Yellen Fed believed as much, I doubt rates would be at 1.25% and their balance sheet would remain ballooned at $4.4 TN.''I would add that a well-functioning financial system is critical to long-term social, political and geopolitical stability. Importantly, well-functioning finance would have mechanisms that promote adjustment and self-correction. This is fundamental to market-based systems. I would argue that this is also a basic premise of sound money and finance. Sound finance would neither suppress market volatility nor work to repeal business cycles - but would instead have inherent characteristics that counteract protracted market and economic excess.
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As I’ve written in the past, I understand why officials did what they did back in the autumn of 2008. Clearly, they were not about to sit back and watch the system collapse. They would also not settle for mere stabilization. Their epic mistake was to push forward with aggressive reflationary policies – a global monetary inflation regime to which they remain entrapped nine years later. While post-“tech” Bubble reflation focused on mortgage Credit and housing, post-mortgage finance Bubble reflationary measures went much farther: reflate risk assets (equities, corporate debt and housing), collapse market yields and force savers out of the safety of deposits and money funds. It was the same flawed doctrine that had nurtured the “worst crisis since the Great Depression” – but on a much grander scale.
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Bernanke had his “mortgage credit quality has been very solid…” For Yellen, it’s “evidence shows that reforms since the crisis have made the financial system substantially safer.” If the Yellen Fed believed as much, I doubt rates would be at 1.25% and their balance sheet would remain ballooned at $4.4 TN.
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I have argued that unparalleled Fed and global central bank inflationary measures molded the “Moneyness of Risk Assets”. In particular, central bank backing ensured that inflating markets in equities and corporate Credit came to be perceived as low-risk stores of value. And with the proliferation of (perceived liquid) fund choices available in the marketplace (ETFs in particular), central banks coupled with Wall Street Alchemy achieved the incredible: the transformation of high-risk securities - with ever-rising prices - into perceived “money”-like instruments.
Returning to the above opening paragraph extracted from Yellen’s speech, I believe it is important to contemplate whether market resilience has been due to sound financial system structure or instead because of central bank-induced market distortions and liquidity backstops. If it’s the latter, it’s critical to appreciate that this extended period of “resiliency” has ensured cumulative financial distortions and Bubble Economy Maladjustment – on an unparalleled global scale. With tens of Trillions of mispriced securities globally, a painful bout of repricing is unavoidable.
We’ll see how resilient “the financial system” proves with the unmasking of risk market liquidity and safety misperceptions. It’s a curious discussion of “Financial Stability a Decade after the Onset of the Crisis,” that glosses over near zero rates, unending QE, Trillions of global debt securities trading with negative yields and the extraordinary expansion of the ETF complex. It recalled Alan Greenspan’s speeches - the reasoned analysis along with the intrigue of what went unsaid. For me, it’s disingenuous and lacks credibility. '
- Doug Noland,
Yellen in Jackson Hole, August 26, 2017
Context '..a truly stable financial and monetary system for the twenty-first century..''..six structural factors .. to prepare for global deflation.''..Given current valuation extremes, the associated market losses are likely to be predictably brutal.''..the scourge of unsound money and inflationism has been so subtle that it goes virtually undetected..'