06 Aug 2013

Yet More (Unimpressive) Evidence of the “Prescient” Janet Yellen

Economics, Federal Reserve, Shameless Self-Promotion 25 Comments

This dispute over the next Fed chair is hilarious. (Thank goodness our system doesn’t place one person in charge of wheat production or computer output. It’s only that little aspect of our economy–the MONEY–that is in the hands of one group of well-connected technocrats.)

I’ve already pointed out one guy who heaps praise on Janet Yellen for thinking we might be in a recession, when it had already started (by the official NBER dating).

Now here’s a new example (HT2 DeLong). James Hamilton writes: “At the outset of the crisis, however, Ms Yellen was also one of the people who saw most clearly the magnitude of the problems facing the economy…. Her speech to the National Association for Business Economics in 2007, when reread today, strikes the reader as amazingly prescient.”

OK, it’s not hard to google that speech. Yes, she did a good job explaining the financial crisis that was already underway. She did indeed point out that the downturn in the subprime market–again, which was already occurring before everyone’s eyes–was being amplified because of derivatives that, in retrospect, the ratings agencies and other institutions hadn’t fully understood. So this was good explanation on her part, but not prediction.

When it came to her assessing prospects for the future, here is what she said in that speech (from September 2007):

While I do think that the present financial situation has added appreciably to the downside risks to economic activity, we should remember that conditions can change quickly for better or for worse—especially in financial markets—so it’s hard right now to speak with a great deal of confidence about future economic developments. It’s also important to maintain a sense of perspective: past experience does show that financial turbulence can be resolved more quickly than seems likely when we’re in the middle of it. Moreover, the effects of these disruptions can turn out to be surprisingly small. A good example is the aftermath of the Russian debt default in 1998. Many forecasters predicted a sharp economic slowdown as a result; but instead, growth turned out to be robust.

Wow! Give that lady a sandwich board! Is the moniker “Dr. Doom” already taken, with over-the-top warnings like that?!

(For people who were decidedly more concerned, try my article from October 1, 2007, Mark Thornton’s truly prescient article from back in 2004, and of course Peter Schiff’s commentary in 2006 on CNBC. Also, I will happily admit that Nouriel Roubini “called the crisis” as well, so I’m not saying this is purely an Austrian thing. What I am saying is that the Yellen boosters are hilarious in their standards for praise. Yes, compared to Ben Bernanke, she was Nostradamus, but that’s not saying much.)

25 Responses to “Yet More (Unimpressive) Evidence of the “Prescient” Janet Yellen”

  1. Matt M. (Dude Where's My Freedom) says:

    Yeah, if correctly predicting the financial crisis made you qualified to be Fed chairman, why haven’t they offered Schiff the job?

    • joe says:

      Have you read this article in the Wall Street Journal from Jan 2009?

      Right Forecast by Schiff, Wrong Plan?

      Peter Schiff predicted a collapse of the U.S. financial system. The bust-up he didn’t foresee was the one that made mincemeat of investors who took his advice in 2008.

      Mr. Schiff’s Darien, Conn., broker-dealer firm, Euro Pacific Capital Inc., advised its clients to bet that the dollar would weaken significantly and that foreign stocks would outpace their U.S. peers. Instead, the dollar advanced against most currencies, magnifying the losses from foreign stocks Mr. Schiff steered his investors into.

      Investors open accounts at Euro Pacific to take advantage of Mr. Schiff’s investment advice, which generally involves shunning investments in dollars. Individual returns can vary. Some investors may like gold-mining stocks, while others prefer energy-focused stocks.

      Most had one thing in common last year: heavy losses. A number of investors said their Euro Pacific portfolios lost 50% or more in 2008, worse than the 38% drop in the Standard & Poor’s 500-stock index last year. People familiar with the firm say that hardly any securities recommended by Euro Pacific brokers gained ground in 2008.

      • guest says:

        A Response to My Critics
        Jan. 30, 2009

        In addition to mischaracterizing many of my beliefs, he also is confusing short-term market fluctuations with long-term economic trends.

        Mish Shedlock Exposed

        Shedlock’s heavy artillery however, was the specific Euro Pacific client account he “discovered” that showed unrealized losses of 49%.

        The problem is that Shedlock threw down a gauntlet that he knew I was legally prohibited from picking up.

        Instead of giving my strategy time to play out, Shedlock seized the opportunity to exploit the short-term declines in the Australian dollar and foreign stocks, to tout the alleged superior performance of his own firm. Since these are the very benchmarks Shedlock chose to evaluate the short-term performance of his strategies, let’s see how well those strategies have held up against those very benchmarks over longer time periods.

        First let’s look at the performance starting in Jan 1, 2009. Since we have no way of knowing which of Sitka’s four strategies an investor would have selected, I simply averaged the returns of all four.

        As you can see Shedlock’s strategies substantially underperformed both Australian government bonds and the spreadsheet portfolio.

        However, had you bought Australian government bonds on that date instead you would have had $215,000. Even if you put $100,000 into the spreadsheet portfolio, despite its being down nearly 50% in 2008, your account would have recovered to $140,600 by the end of Sept. 2012!

        So even from their respective inception dates, and despite the huge declines in the Australian dollar and foreign stocks in 2008, no matter which Shedlock strategy an investor chose, his account substantially underperformed both Australian government bonds and the spreadsheet portfolio!

      • Bob Roddis says:

        I don’t recall a single Austrian in 1982 predicting the coming 80s boom. I recall predictions of doom and gloom and high gold prices as the boom began and gold prices collapsed. So what?

        Having lived through that, in 2009, I predicted endless bad times, “moderate” CPI inflation in the short run with the new funny money going into propping up financial asset prices for the elite. So what?

        Neither event proves or disproves Austrian analysis.

        • guest says:

          Ron Paul predicted the 1987 Recession in 1983

          • Bob Roddis says:

            I think that by 1983, it was clear things were getting better. But in 1981 with 21% interest rates and it being clear that Reagan was going to massively increase spending and not cut it, almost all of the “gold” gurus were predicting doom and inflation (and some were predicting imminent hyper-inflation). I don’t recall them predicting essentially a 25 year boom.

      • Bob Roddis says:

        I also recall a vast chorus of Austrians saying in 2005-2006 that there was a dangerous housing bubble. And that GM was about to collapse.


        Why didn’t Yellen know this?

      • Richie says:

        Here we go with the “Well blah blah predicted this” non-sense. Can we for once stop with all of this bull$hit predicting ridiculousness? EVERY economic school has been dead wrong about predictions in the past – Keynesians, MMTers, Chicaoites, Austrians.

        Gee, could it be because the economy is not some homogeneous blob that can be steered like a vehicle? Human behavior is unpredictable and fluid. It can’t be captured and predicted with a fancy econometric model dressed up with letters from the Greek alphabet.

      • Tel says:

        Mr. Schiff’s Darien, Conn., broker-dealer firm, Euro Pacific Capital Inc., advised its clients to bet that the dollar would weaken significantly and that foreign stocks would outpace their U.S. peers. Instead, the dollar advanced against most currencies, magnifying the losses from foreign stocks Mr. Schiff steered his investors into.

        All of those things happened, somewhere around 2010 if I remember rightly.

        • Tel says:


          There’s a chart of the US dollar devaluing over 2009 up to the start of 2010 (vs the Euro). Pretty much the time QEII came through. If I remember rightly the AUD was pretty high around that time too.

          Around 2012 the QE started to slow down (but not stop) and the US dollar has strengthened somewhat. Seems to follow the theory.

          Mind you the Euro had its own share of problems, so to do it properly you would have to look at USD against a bunch of currencies. Anyhow, regarding Schiff… if US investors invested in EU stocks and then bailed at the right time they could have done OK. If they invested in Japanese stocks and bailed before Abenomics hit, they could also have done OK.

          This is all double-guess the central planners though. Yes human behaviour is fluid and unpredictable, but only the behaviour of a handful of humans is important.

    • thinkingotherthings says:

      This is excellent.

  2. Bob Roddis says:

    Janet Yellen is apparently a Minsky-ite. {The Levy Economics Institute of Bard College is nest of MMTers):


    Minsky-ites kinda/sorta note that “private” funny money loans result in bubbles, but they are resolute in suppressing and ignoring how these loans distort and impair economic calculation. Therefore, the fault for bubbles does not lie with the government intervention and funny money system. Instead, the fault lies with the silly and irrational investors who must be saved by the omniscient and benevolent bureaucrats.

    If the economy is indeed going to go down the drain in the next few years, I’d prefer a leftie Minsky-ite at the helm of the Fed so we can blame it all on interventionism as opposed to an alleged Republican-appointed “conservative”.

  3. William Anderson says:

    Let’s see. Janet Yellen’s qualifications are that she can turn a crank faster than might Larry Summers, and Paul Krugman supports her. Remember that Krugman has claimed our current economic malaise is due to a lack of…inflation.

    So, I guess that means Krugman expects Yellen to give us all of that inflation that we need.

  4. Demosthenes says:

    Not sure why her predictive ability is relevant to the job.

    I would think that the expansion of the monetary base and the concomitant relative lack of inflation over the past few years — which has called your own credibility on predictions into question Bob — would’ve led you to reevaluate some just how much the Fed is “in charge of money production.”

    • Mike T says:

      “Not sure why her predictive ability is relevant to the job.”

      >> Where does Bob state “her predictive ability is relevant to the job?” You may want to direct that criticism toward James Hamilton who seems to think so. Based on the article Bob links to in his post, Hamilton’s defense of Yellen is predicated on his opinion of Yellen’s prescience. This post merely questions her prescience, not whether it’s relevant or not to the job.

  5. Bogart says:

    This sentence in the talk jumped out at me:
    “Moreover, the effects of these disruptions can turn out to be surprisingly small.”
    Or they can crash government sponsored enterprises and in a few short months make the largest financial companies insolvent requiring large bailouts even when the law prohibited them.

    Also: Prediction is easy, timing is difficult. All of these predictions of inflation have for the most part come true as the real inflation rate is higher than 5%. It was 4% inflation that prompted Nixon to order wage and price controls that ended in fuel crunch and 15% inflation of the 1970s. But even if you believe the official government inflation numbers, the game simply is not over yet as to when these predictions will come true.

  6. Major_Freedom says:

    Appointing Fed chiefs was never about pure intellect.

    • Matt Tanous says:

      Was it ever about intellect at all?

  7. Tel says:

    For what it’s worth, I do support the idea that successful prediction is the most valuable part of a theory (because I’m an empiricist, and that’s how the scientific method works). By the way, people citing axioms and deductive reasoning should take note of Mises:

    But to make a man act, uneasiness and the image of a more satisfactory state alone are not sufficient. A third condition is required: the expectation that purposeful behavior has the power to remove or at least to alleviate the felt uneasiness. In the absence of this condition no action is feasible. Man must yield to the inevitable. He must submit to destiny.

    So even if you don’t like the idea of theory being measured by prediction, in order to take action, you must have some idea what the action will do… and that is a prediction. So if you study economic theory with no intention of making predictions then you have also abandoned any attempt to take action… one theory is as good as any other.

    Use Empiricism, or use Praxeology, but predictions are necessary regardless.

  8. Yancey Ward says:

    This should be your next Fed chairman:


  9. Bob Robertson says:

    By “recognized the magnitude of the crisis”, they mean, “Would have dumped even more currency than Bernanke did, and faster”.

    The greatest argument against Keynesian claptrap is the fact that it’s been tried over, and over, and over, to every greater magnitudes, and all it does is fail WORSE.

  10. Silver Price says:

    And my concern today is that the bursting of the housing bubble — we have not seen it yet — is going to lead to broader systemic banking problems. It is going to start with the subprime lenders — they are already in trouble because of increases in delinquencies and foreclosures — and then it is going to be transmitted to other banks and financial institutions all over the country.

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