Have you heard the news? Janet Yellen is positively clairvoyant!
Yellen, vice chairman of the Federal Reserve and, evidently, a front-runner to replace Ben Bernanke as chairman in several months, “was one of the first members of the Federal Open Market Committee . . . to realize that the [housing market’s troubles] could cause a major recession.” (Alan Blinder, Wall Street Journal, July 29.) She “was one of the only top Fed policy makers who warned about the housing bubble before the crisis.” (Edward Harrison, New York Times, July 29.) Yellen “raised concerns about the housing bubble in the mid-2000s, and highlighted the danger of a credit crunch in 2007.” (Matthew O’Brien, The Atlantic, July 30.) She displayed “prescience” and “identified the impending threats that both the housing bubble and the shadow banking sector posed to our entire economy.” (Roughly a third of Senate Democrats, in a letter to President Obama, July 26.) She “warned early and often, starting at least in 2005, about the problems in housing and the looming economic catastrophe.” (Mark Gungloff, Huffington Post, July 29.)
A bona fide economic Nostradamus, it would seem. But a perusal of her past reveals that Yellen’s soothsaying record is decidedly more muddled.
Here is Yellen in a speech in October 2005, when she was chairman of the San Francisco Fed. Remember, this was, according to Matthew O’Brien, back when she was “raising concerns about the housing bubble.”
In my view, it makes sense to organize one’s thinking around three consecutive questions—three hurdles to jump before pulling the monetary policy trigger. First, if the bubble were to deflate on its own, would the effect on the economy be exceedingly large? Second, is it unlikely that the Fed could mitigate the consequences? Third, is monetary policy the best tool to use to deflate a house-price bubble?
My answers to these questions in the shortest possible form are, “no,” “no,” and “no.”
She went on to say that, even in the event of a housing downturn, “it could be large enough to feel like a good-sized bump in the road, but the economy would likely to be able to absorb the shock.”
A few months later, in a speech in April 2006, Yellen noted the remarkable uptick in housing prices (i.e. the catastrophic housing bubble) in the San Francisco Bay Area. Yet she all but shrugged the high prices off. “There are well-known and unique features of this area that lend some justification to its high housing values,” she said, “First, there is not much land available for new home building, so the supply of new homes is fairly limited. In addition, this area enjoys very favorable lifestyle amenities and it has a job base that attracts high-income residents.” (San Francisco housing prices would end up falling by more than 50 percent from their 2006 peak, one of the worst performances in the country.)
At a Fed meeting in September 2006, Yellen was similarly sanguine, despite by-then falling home prices: “The speed of the falloff in housing activity and the deceleration in house prices continue to surprise us,” she allowed. But not to worry! “Of course, housing is a relatively small sector of the economy, and its decline should be self-correcting,” she cooed.
By February 2007, she thought her predicted correction had already occurred. In a speech, she reported “signs of stabilization in the housing market,” and was pleased to report that, according to Marketwatch, that “housing’s slowdown had [not] spilled into other parts of the economy.” In fact, she said that she was more worried about inflation than the housing downturn.
By April 2008, Yellen did say the economy was “all but stalled,” and warned that housing would continue to be a drag into 2009. But by then, the country was four months into what would prove to be the worst recession in seventy years, and housing prices had been falling for the better part of two years. Anybody sitting in your neighborhood bar could have told you that the economy was in trouble. Praising Yellen’s predictive abilities based on that 2008 speech is akin to lavishing praise on a weatherman whose forecasting method consists of looking out the window during a storm and then breathlessly reporting that it’s raining.
In other words, Yellen’s take on the housing market was . . . pretty much the same as everybody else’s. She underestimated the risks of the housing bubble and only recognized the terrible truth when it was already much too late.
Yet somehow Yellen has managed to gain a reputation for prescience. It’s a testament to the fact that if you have friends in the media who say something enough times – no matter how dubious – it will enter the bloodstream of mainstream political discourse.
But it’s instructive and suspicious that, even when writing online, many of Yellen’s defenders don’t provide any evidence of her purported forecasting genius – they simply argue by assertion. (Princeton’s Alan Blinder, rhapsodizing about Yellen in the Wall Street Journal, was probably the most honest of all of her defenders, when he wrote, “Full disclosure: She is a close friend.”)
Even when they do provide evidence and links that are supposed to prove Yellen’s foresight, they don’t actually corroborate the claims. For example, O’Brien of The Atlantic links to an October 2005 speech, in which Yellen discussed the housing market. But her entire argument regarding housing prices was couched in hypotheticals: “if house prices fell, the negative impact on household wealth could lead to a pullback in consumer spending,” she said, before pointedly concluding, “My bottom line is that. . . I’m certainly not predicting anything about future house price movements.” She also said that a cooling of housing prices represented a “downside risk” for future economic growth, but that’s hardly the definitive warning that Yellen’s partisans would have us believe. (And don’t forget, she made those remarks in the same month that she gave her famed “no, no, and no” soliloquy.) The Calculated Risk blog, meanwhile, links to two Yellen speeches from 2005 to 2006, in which she said that housing prices might fall. That’s all well and good, but it skirts the real point. The key issue is not that Yellen occasionally mused that housing prices might fall – it’s that she repeatedly argued that, even if they did, the broader economy would only suffer minimal damage.
Janet Yellen – gender blackmail aside – may prove a fine candidate for Fed chairman. But was she more prescient about the housing bubble and the recession than most? To borrow a phrase: no, no, and no.