Last night, Janet Yellen was accompanied by her three predecessors as Fed Chairmen, Ben Bernanke, Alan Greenspan and Paul Volcker at a forum in New York discussing various issues.

In the wake of Donald Trump declaring that the economy was a bubble, and that a large recession was on the cards, moderator Fareed Zakaria asked Yellen if we really were in a situation ‘as perilous as some on the campaign trail have been suggesting.’ This was Yellen’s response in full:

So I would say the US economy has made tremendous progress in recovering from the damage from the financial crisis. Slowly but surely the labor market is healing. For well over a year we’ve averaged about  225,000 jobs a month. The unemployment rate now stands at 5%. So, we’re coming close to our assigned congressional goal of maximum employment.

 

Inflation which, my colleagues here Paul and Allen, spent much of their time as chair, bringing inflation down from unacceptably high levels. For a number of years now inflation has been running under our 2% goal and we’re focused on moving it up to 2%.

 

But we think that it’s partly transitory influences, namely declining oil prices, and the strong dollar that are responsible for pulling inflation below the 2% level we think is most desirable. So, I think we’re making progress there as well, and this is an economy on a solid course, um, not a bubble economy.

 

We tried carefully to look at evidence of potential financial instability that might be brewing and some of the hallmarks of that, clearly overvalued asset prices, high leverage, rising leverage, and rapid credit growth. We certainly don’t see those imbalances. And so although interest rates are low, and that is something that could encourage reach for yield behavior, I wouldn’t describe this as a bubble economy.

More specifically, her reasoning as to why this can’t be described as a bubble economy:

We tried carefully to look at evidence of potential financial instability that might be brewing and some of the hallmarks of that,

such as

clearly overvalued asset prices,

MW-EB006_overva_20151210143625_ZH

(‘Now’ was December of 2015)

high leverage, rising leverage,

-1x11-1

-1x-1-1x-1NYSE-margin-debt-SPX-since-1995

and rapid credit growth.

fredgraph

 

We certainly don’t see those imbalances.

Ordinarily, one would suggest that she look a little harder, but in this case the suggestion would be futile. The famous Upton Sinclair quote about a man (or in this case woman) not being capable of understanding something when he or she is paid not to understand it is apropos.

Central bankers will never, ever see a bubble ahead of time because that would mean admitting some sort of fault. Central banks attempt to guide and steer the economy through the business cycle, and thus if a bubble arises, it is almost completely of their doing. Thus, they can never admit to it before the fact.

After it bursts, however, all sorts of gnashing of teeth occurs as to why the inevitable crisis was unforeseeable, thanks to some insidious development out of their control. The go-to excuse the last time around was a savings glut in Asia. Who knows what they’ll say this time.