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 email@example.com.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Bell’s last-second TD lifts Steelers over Chargers
- Rossi: Just wait until Ben comes back
- Steelers defense displays resiliency in victory over Chargers
- Steelers notebook: Receiver Bryant inactive for game vs. Chargers
- East Allegheny gives judge candidate’s seat on school board to her husband
- Eagle Scout candidate completes replacement of Versailles park’s retaining wall
- Pitt running out of options to slow down Georgia Tech offense
- Pa. Supreme Court ‘disturbed by content’ of emails attributed to justice
- Pittsburgh police investigate fatal Mt. Washington shooting
- Looking toward home opener, Penguins work to end scoring drought
- Ellwood City Area School District avoids strike set for Tuesday