No more crisis in our life times

Well, that is not what I believe. But, that is what Ms. Janet Yellen, chairperson of the Federal Reserve believes. When I read it in a blog post by Gavyn Davies, I could not believe my eyes. Why would anyone say that? It is bad risk management. If it did not happen, no one would remember the prediction. If it happened, her predictions would be played over and over again. Ask Chuck Prince. Perhaps, he has stopped dancing now.

According to a Reuters story, this is what she said:

Would I say there will never, ever be another financial crisis? You know probably that would be going too far but I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will be. [Link]

I was glad to find John Mauldin come out with a strong reaction to her remarks:

I disagree with almost every word in those two sentences, but my belief is less important than Chair Yellen’s. If she really believes this, then she is oblivious to major instabilities that still riddle the financial system. That’s not good. [Link]

His entire post, ‘Prepare for turbulence’ is worth reading.

With amazing consistency, the International Monetary Fund wrote in its Article IV assessment of the Eurozone that the European Central Bank should maintain its current easy money policy and that it should not hasten into a tightening. In the same breath, it added that debt-heavy countries in Europe have not utilised the space afforded by the easy money policy to undertake fiscal consolidation and improvement. See this:

Most high-debt countries have so far not saved the windfall interest reductions from monetary accommodation (text figure). It is important to make decisive progress on fiscal adjustment before monetary accommodation is reduced. Otherwise, countries could face dangerous debt dynamics as interest rates rise—running the risk that self-fulfilling expectations could emerge if markets begin to doubt fiscal sustainability. [page 21-22 – link]

Why would they? When we make bad habits less costly for people, they do not stop them. They persist with them. That is what governments are doing. Central banks are not making it easy for governments to shed debt addiction. They are making it easy to stay addicted. Low interest rates remove pressure to reform. No pain; no gain. No pain; no reform.

I enjoyed writing my MINT column for August 1. I said it was time for the queen to ask intellectuals as to why they were failing to stop another crisis coming. By the time she asks the question again, assuming she does, it might well be too late.

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