Former Fed Chairs Speak: Greenspan Sees Economy Slowing, Yellen Worried About High Corporate Debt
In case you missed it, the Ghosts of Christmas Past returned last week, or should I say the Ghosts of Fed Chairs Past returned last week to offer their takes on risks to the economy. Of course I’m speaking about former Fed Chairs Alan Greenspan and Janet Yellen.
Greenspan Sees Slowing Economy
Speaking to FOX Business on December 13, former Federal Reserve Chairman Alan Greenspan said that the U.S. economy is poised to slow down very soon.
“Just wait until the fourth quarter number comes out, it is going to be down around 2.5 percent,” Greenspan said during an exclusive interview with Maria Bartiromo. The number he was speaking about was fourth quarter gross domestic product.
Greenspan went on to say, “We have monthly data which suggests that we are slowing down, we are not going negative, but we are definitely slowing down – the rate of growth as we go into 2019 probably at a 2 to 2.5 percent pace maximum.”
Greenspan’s Issue with GDP
At the end of the third quarter, U.S. GDP was a relatively strong 3.5 percent, according to a revised estimate from the Bureau of Economic Analysis. However, Greenspan indicated he wasn’t concerned about total GDP, but rather gross domestic savings, which consists of savings of the household, private corporate and public sectors. This is the critical factor driving his outlook for the economy.
“Gross domestic savings is the key funding to capital investment in the United States, and as a result we are seeing capital investments slowing down,” he said.
Although in Greenspan’s opinion, a recession is unlikely, he does think the U.S. has entered a period of stagflation with the blame being placed on runaway spending and entitlement programs.
“We are not funding our entitlements and as a result we have this huge deficit – [a] trillion dollar budget deficit,” he said. “You can’t exist with that sort of phenomenon without inflation re-emerging itself.”
Former Fed Chair Janet Yellen Not as Optimistic as Greenspan
Last week, Janet Yellen, speaking at a small event in Washington, said she is worried about the next financial crisis and that her biggest concerns were the potential for reversal of financial safeguards put in place after the last major crisis nearly 10 years ago. Furthermore, she is also worried about growing corporate debt.
“I am worried that we are in a deregulatory mode and I see a lot of pressures building in the system to go further to really weaken fundamental safeguards that were created in Dodd-Frank. We are a decade after the financial crisis so that would be worrisome and wrong to do.”
Yellen’s main concern about a financial crisis is that monetary policy’s traditional short-term interest rate lever is not available to address a new downturn in the economy. She is worried that the Fed may not have the monetary policy tools necessary to fight the next economic crisis.
Yellen Sees High Levels of Corporate Debt an Issue
Yellen expressed concerns over the high levels of corporate debt, saying that the issue is similar to what triggered the financial crisis.
“You had investors that were reaching for yield and wanted to hold securities that they thought were safe, but that had reasonably high yields. There are a lot of investors in this low interest rate environment who are reaching for yield.”
Although Yellen did not see a threat to the banking system, she does think corporations face risks.
“If the economy experiences any kind of negative shock where rates go up more than expected there will be a lot of corporate bankruptcies, a lot of distressed credit crunch a lot of downgrading of loans, a lot of investor losses,” said Yellen.
She went on to say that she is “disturbed” that she does not see regulators having the tools to address this risky form of lending.
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