We Are In the Best of Hands: Janet Yellen Edition

The Arizona Republic today reviews a speech given by Yellen in January, 2007 in Phoenix:

It was January 2007 when Yellen, then head of the Federal Reserve Bank of San Francisco, spoke here about financial literacy before transitioning into comments about the economy — comments that now look remarkably unperceptive.

Back then, months before the real-estate and banking crisis took down the economy, Yellen expressed concern that inflation was uncomfortably high while job gains were coming too swiftly.

“If labor markets are as tight as the unemployment rate suggests, then there may be reason for concern about building inflationary pressures,” she said according to my Jan. 18, 2007, article.

Subsequent events showed that inflation was the last thing we had to worry about, while the lack of jobs has emerged as a central drag on the economy. Back then, U.S. unemployment was around 4.5 percent. But after the recession took hold, it more than doubled, peaking at 10 percent in late 2009. At 7.3 percent currently, it remains well above where it should be this far into an economic recovery.

In contrast, core consumer inflation (which excludes food and energy costs) of 1.8 percent today has hardly budged from the 2.2 percent rate that had Yellen all worked up back then.

In another comment during her Phoenix talk that now looks wildly off-base, Yellen, who later was named vice chair of the Fed’s board of governors, said recession risks had receded despite lingering weakness in housing. She cited the Valley as a place where home-price appreciation had come down from unsustainably high rates of increase.

The Great Recession, as we all now know in hindsight, began later that year, triggered by a home-price slide of epic proportions.

I don't want to beat her up too bad for missing the bubble burst, since most everyone did.  They also all missed the last bubble burst, and the one before that, etc.

This is what makes me crazy:  not that these folks were wrong, even consistently brutally wrong, but that they display absolutely no modesty in their actions given that they were so wrong.  They propose policy steps, such as seemingly eternal QE, that are astoundingly risky unless one assumes that they have a very, very good grasp on exactly where the economy is going.  Which they clearly never have had in the past.  If they acted like they had been wrong most of the time, then I would have little to criticize.  But to be consistently wrong and then make huge risky bets as if you have reliable predictive powers is hubris of the worst sort.

  • John O.

    The Chileans were way ahead of their time on this whole state economic planning business when they built Project Cybersyn. Cybersyn is what everybody in DC wishes we had so we can be the perfect utopia already! Every Federal Reserve decision would be the right decision if we had one of these! http://en.wikipedia.org/wiki/Project_Cybersyn

  • 3rdMoment

    This lazy reporter didn't even go back and read the 2007 speech, instead he just cites his own 2007 article! if you read her speech with the full context, you get a quite different picture of her views:

    http://www.frbsf.org/our-district/press/presidents-speeches/yellen-speeches/2007/january/the-u-s-economy-in-2007-prospects-and-puzzles-scottsdale/

    Furthermore, why don't you (Coyote blogger) say anything about YOUR OWN predictions about inflation? Here's you in March 2009:

    "I just do not see how there is going to be any way to avoid a substantial uptick in inflation over the next couple of years. Crazy-large deficit spending, huge inflation of the money supply, absurdly low interest rates, massive government money-printing efforts, and government-mandated tilts in the balance of power between labor and management towards the unions can only add up to inflation."

    Sorry, but this turned out to be more wrong (and less modest) than anything in Yellen's 2007 speech.

  • kidmugsy

    On QE, we must remember that Keynes was no Keynesian. Here he is, as quoted in this morning's Telegraph:
    To think output and income can be raised by increasing the quantity of money is rather like trying to get fat by buying a larger belt.

    (H/T Liam Halligan , quoted by dearieme)

  • Rick Caird

    The difference is if Coyote is wrong, he affects only himself. Yellin and others in the Fed, however, .....

    So, maybe you ought to consider "impact". For example, if you are wrong, nobody cares.

  • jdgalt

    The real outrage in her speech is her "concern that job gains were coming too swiftly." Job gains = benefit to the public. GDP, inflation, the Dow, and all other statistics are completely unimportant in comparison.

  • obloodyhell

    }}} peaking at 10 percent in late 2009. At 7.3 percent currently, it remains well above where it should be this far into an economic recovery.

    News Flash: It's still over #$^%@#^@$&$% 10%.

    Just because it's carefully designed to lie does not make it the truth.

  • obloodyhell

    *I* care!! If he's wrong, OFF WITH HIS HEAD!!.

    See? Now even HE cares... :o D

  • obloodyhell

    }}} Sorry, but this turned out to be more wrong (and less modest) than anything in Yellen's 2007 speech.

    Sorry, I believe this is well suited to some dialogue from Addams Family Values:

    Amanda: Hi, I'm Amanda Buckman. Why are you dressed like that?
    Wednesday: Like what?
    Amanda: Like you're going to a funeral. Why are you dressed like somebody died?
    Wednesday: Wait.

    Give it time. At some point, doing wonky things with the money supply ephs things up. I grant it's surprising that it hasn't already, but, as noted, if it's wrong, that's useful information, too, and no one is going to get screwed because he was wrong.

    But I doubt if it's wrong...

  • Rick Caird

    Ah, the ol' Red Queen approach. Where's Alice?