Former Federal Reserve Chair Janet Yellen is making the media circuit and pontificating about the evolving economic crisis. As Peter recalled on his podcast, it wasn’t long ago that Yellen was saying she didn’t think we would ever see another financial crisis “in our lifetime?”
Yet, here it is, just a few years later, and we already have another financial crisis.”
When Obama nominated Yellen to head up the Fed, everybody was saying she predicted the 2008 crisis. Peter went back and looked at her speeches in 2005 and 2006. Not only did she not predict the meltdown; she said anybody who thought a crisis was coming was wrong. She said the housing market was in great shape and there was nothing to worry about.
Nobody was more clueless than Janet Yellen. Yet somehow, everybody decided to give her credit for having predicted and warned about the financial crisis.”
So, she didn’t see the ’08 crisis coming. And then she said we’d never have another one. Now she has the nerve to say the reason we’re entering into another crisis now is because corporations took on too much debt and they bought back too much stock.
Now ain’t that rich?”
Of course, she’s not wrong. Corporations are levered up. In absolute terms, business debt had skyrocketed to a record $16 trillion by the end of 2019. US corporate debt increased by 5.1% year-on-year between in 2019, much faster than economic growth. As a result, debt levels also reached historic highs in terms of percentage of GDP. According to a Federal Reserve report, debt growth has outpaced economic output “through most of the current expansion.”
But why did this happen? Who enabled corporations to get so levered up?
Had the Federal Reserve not kept interest rates artificially low, it would have been too expensive for the corporations to borrow the money and they couldn’t have financed the share buybacks. The only reason corporations had so much debt was because the Fed kept interest rates so low enabling the borrowing. And the only reason that corporations could finance all these share buybacks was because the cost of doing so was so low thanks to the Fed.”
And this wasn’t by accident. The Fed did it on purpose. The corporations did exactly what the central bank wanted them to do.
In fact, they said that upfront. They were making money so cheap because they wanted everybody to borrow it. In fact, the specifically said they wanted a stock market bubble. That was their solution. When one bubble pops, inflate another one.”
So, it’s pretty ironic that Yellen is blaming corporations for doing exactly what the policies she implemented were designed to incentivize them to do.
The big Wall Street banks blame the Fed as well. But Peter said that’s like the bartender and the drunk arguing over who’s at fault when the drunk gets drunk. Both share in the blame. But at some point, the guy who is drinking is so drunk that the only person thinking rationally is the bartender.
That’s what I think happened. I think early on when the Fed liquored everybody up, and Alan Greenspan was the initial bartender, but initially, people took the money and they were still a little sober. But once you have a few drinks from the Fed’s tap and you’re wasted, then what do you expect? I mean, you’re too drunk to know any better. Yet, all these Fed bartenders kept spiking the punch bowl. And now they want to claim, ‘Oh, it’s not our fault.’”
George Bush famously quipped, “Wall Street got drunk.” But Peter said nobody ever bothered to consider the bartenders. First, it was Greenspan, then Bernanke and then Yellen. Powell tried to stop serving drinks, but as soon as the stock market started to tank in late 2018, the bar was wide open again.
Drinks are on the house! That’s where we are. The whole thing is ridiculous that they’re arguing over who’s at fault. Clearly, they both bear some of the responsibility. But most of it has got to lie with the Fed. Yet, these guys claim none of it.”
Peter went on to talk about an interview he watched with Bernanke. In this podcast, he also discussed the perverse impacts of stimulus and bailouts, and Larry Kudlow’s transition from free-market advocate to Keynesian high-priest.
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