When I was a kid, my friend Adam’s mom used to put us down in the basement and told us to do whatever we wanted, as long as it didn’t affect her living room or dining room furniture on the first floor. “You guys can kill each other for all I care, just don’t damage the house.”
Neil Irwin (The Upshot) has the most lucid interpretation of Fed Chair Janet Yellen’s remarks yesterday – the upshot (no pun intended) is that Yellen is not concerned primarily with the presence or absence of bubbles, but rather with how those booms and busts will affect the real economy. Her inadvertent message to The Street, therefore, is game on. Emphasis mine below:
Janet Yellen just delivered the most significant speech yet in her still-young Federal Reserve chairmanship. It doesn’t necessarily send any startling signals about what the Fed will do next month or even next year. But it tells us a great deal about how she will deal with new risks on the horizon from financial bubbles.
Ms. Yellen stakes out her position in about as clear a language as you’ll see from a central banker: She believes that it would most likely be a bad idea to raise interest rates to fight financial excesses. Her focus, crucially, is not on preventing Wall Street from having ups and downs, but on making sure that those ups and downs don’t bring economic disaster.
This focus on resilience differs from much of the public discussion, which often concerns whether some particular asset class is experiencing a “bubble,” and whether policy makers should attempt to pop the bubble. Because a resilient financial system can withstand unexpected developments, identification of bubbles is less critical.