This morning’s rally on Larry Summers’ withdrawal of his candidacy for Fed chair should remove any doubt about what drives markets. The new leader in the Fed race is Janet Yellen, who makes Bernanke look like a monetary conservative and highly accurate predictor.
– 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? No and No.
– Taking all of these points into consideration, it seems that the arguments against trying to deflate a bubble outweigh those in favor of it.
– One reason that risk premiums may be low is precisely because the environment is less risky
– I did not see and did not appreciate what the risks were with securitization, the credit ratings agencies, the shadow banking system, the S.I.V.’s — I didn’t see any of that coming until it happened.
Be scared. Be very scared.