San Francisco Federal Reserve Bank President Janet Yellen says the Fed's monetary policy may have played a role in the U.S. credit boom and the resulting housing price bubble. But he added they were by no means the only factor.
Yellen also said the U.S. has entered its sixth quarter of recession, with no end on the immediate horizon.
While we've seen some tentative signs of improvement in the economic data very recently, it's still impossible to know how deep the contraction will ultimately be, she said. The global nature of the downturn raises the odds that the recession will be prolonged, since neither we nor our trade partners can look to a boost from foreign demand.
In remarks prepared for delivery Thursday in New York City, Yellen said the Fed's accommodative stance from 2002 to 2004 was motivated by then-Chairman Alan Greenspan and what she called risk management policy.
Yellen added that while financial bubbles can be difficult to recognize early, not dealing with certain kinds of bubbles before they get big can have grave consequences.
Yellen said a combination of risky behavior by financial institutions and U.S. households contributed to the financial system meltdown.
U.S. households enthusiastically leveraged themselves to the hilt, Yellen said. The personal saving rate, which had been falling for over a decade, hovered only slightly above zero from mid-2005 to mid-2007. A good deal of this leverage came in the form of mortgage debt.
Yellen's comments came at the 18th annual Hyman P. Minsky Conference on the State of the U.S. and World Economies at Bard College in NYC.
She called the financial crisis a Minsky Meltdown, centered on the creation of financial bubbles.
Yellen said the risks taken by investors were unrealistic.
Some of the investors who put money into highly risky assets were blithely unaware of how far out on a limb they had gone, she said. Many of those who thought they were in the hedge category were shocked to discover that, in fact, they were speculative or Ponzi units.
Yellen said the loans only made sense had house prices continued to go up. Once those prices started to go down, we were quickly in the midst of a Minsky meltdown.
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