There’s a common urban legend, said Marc Chandler, one the Federal Reserve even fosters— that the Fed kills business cycles. “People like Janet Yellen say the Fed is a murderer.” But to Chandler, this isn’t the case.
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In Chandler’s experience, Fed policy is rarely the culprit behind a financial crisis. Many people, even the Fed itself says it kills business cycles, but Chandler believes it’s not bad decisions or bad investments that lead to a crisis but when “there’s too much risk in the system.”
“The great financial crisis wasn't caused by too tight of Fed policy, the tech bubble wasn't caused by too tight of Fed policy, the savings and loan crisis wasn’t caused by too fight of Fed policy and those were the last three economic downturns.” Chandler continued, “for me, it leaves us vulnerable to what really hurts us, and that's financial instability.”
What Causes Financial Instability?
Chandler related this instability to land in a severe drought. “You know that you're vulnerable to a fire but you're just not sure what's going to be the spark, where it's going to be. And I think in some ways it's true about the financial conditions.”
People have their blinders on when it comes to two things which concerns Chandler, he said, because it can make us more vulnerable. “One is inflation and secondly…the Fed’s pivot. Here we are with the stock market making new highs and people are revising down their corporate earnings outlook.”
There are many areas for potential financial vulnerability, Chandler noted, such as the Treasury market and in currencies. “I think that's really the take-away is that ultimately it's not a bad decision or bad investment that causes the crisis but it's too much risk in the system… it's that financial stability itself leads to instability."
To listen to the full podcast and interview, see Divergence Driving Dollar Higher, Says Marc Chandler. For the full archive of our free and premium podcast shows, go to our Financial Sense Newshour podcast page.