What Toxic Preconditions for Financial Crisis?

 

Now Even a Fed Dove Homes in on the “Everything Bubble”

By Wolf RichterApril 20, 2018

Bonds, junk bonds, spreads, commercial real estate, leveraged loans, over-leveraged companies… all get named as risks to the banks. This is why tightening will continue.

“If we have learned anything from the past, it is that we must be especially vigilant about the health of our financial system in good times, when potential vulnerabilities may be building,” explained Federal Reserve Board Governor Lael Brainard in a speech in Washington, D.C., this morning.

This was a reference to a time-honored banker adage, now mostly forgotten after nearly nine years of easy money: Bad deals are made in good times.

Brainard fills one of the seven slots on the Board of Governors. Two slots are filled by Chairman Jerome Powell and by Randal Quarles. Four slots remain vacant, waiting for Trump appointees to wend their way. She is a strong “dove” in the world of central banks, and she just pointed at why the Fed is tightening – and will continue to tighten: the Everything Bubble.

After rattling off a litany of indicators showing why and how the economy’s “cyclical conditions have been strengthening,” she added this gem, there being nothing like Fed-speak to make your day: “Currently, inflation appears to be well-anchored to the upside around our 2 percent target.”

“Well-anchored to the upside” of the Fed’s target – and then she moved on to the “signs of financial imbalances.”

“Financial imbalances,” in Fed speak, are asset bubbles, a phenomenon when prices are out of whack with economic reality. In a credit-based economy,

Continue reading.

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