Yellen gets ticking time bomb
Ben Bernanke turned over leadership of the Federal Reserve Board to Janet Yellen last week. Before departing, though, the chairman put in place another $10 billion tapering of the bond-buying economic stimulus program known as quantitative easing, as well as possible asset bubbles formed by his $3 trillion to $4 trillion program.
Yellen has the delicate task of defusing this ticking bomb without causing a financial or economic collapse and a price surge in precious metals. Since the dollar remains the International Reserve Currency, the results of Yellen's actions will be of worldwide interest.
Large tranches, or portions, of the $85 billion in bond-buying money by Bernanke flowed abroad to seek investment opportunities in emerging economies, driving up the values of emerging nations' currencies. Money flowed to nations such as Australia, Brazil and Canada, who supplied emerging nations with raw materials.
With a tapering of the flow of synthetic currency, hot money is leaving the currencies of emerging nations and their suppliers. To stem the outflow of the Lira, Turkey's central bank increased its overnight lending rate to 12 percent and its overnight borrowing rate to 8 percent — one indication of the reach of Bernanke's stimulus.
Doubtless, Bernanke's initial unprecedented injections of bond buying saved Wall Street, especially the “too-big-to-fail” banks that are key participants in the Fed's manipulation of equity, bond and precious metals markets. After enormous citizen bailouts, these banks are larger than ever. Despite the so-called “Volcker Rule,” they continue to engage in extensive derivative trading for profit, rather than hedging and creating possibly multitrillion-dollar bubbles.
Although government statistics camouflage likely bubbles in key markets such as equities, bonds and real estate, the trillions of dollars must have gone somewhere.
“I worry about macro-prudential complacency,” Harvard University professor Lawrence Summers told the Davos Forum in January, in a reference to the belief that central banks can control lenders to head off major problems.
The fact is, bubbles generally burst. Moreover, bubbles are extremely difficult — if not impossible — to deflate without a “pop,” much less a “bang.”
A multitrillion-dollar economic bang could spell catastrophe. This is the first great task Yellen faces. She must defuse a possible series of bubbles amounting to many trillions of dollars without harming the economy.
In the words of former Bank of International Settlements adviser Stephen Cecchetti, Yellen is “going to be trying to do something that no one has ever done.”
Christine Lagarde, International Monetary Fund managing director, warned at Davos last month that tapering “is a new risk on the horizon and really needs to be watched.”
The U.S. economy appears to be improving, but China's growth rate has fallen to single figures and emerging economies are raising concerns.
Rumors abound that much of the “official” gold holdings of Western nations' central banks lie increasingly in Far East central bank vaults.
Yellen deserves sympathy. Taking the helm of the most powerful central bank, she will be navigating uncharted territory.
John Browne, a former member of Britain's Parliament, is a financial and economics columnist for Trib Total Media. Contact him at firstname.lastname@example.org.