Fed Speak Translated

Recently Federal Reserve Vice Chair Janet L. Yellen gave a speech at the 2011 International Conference on monetary policy where she spewed out some of fairly ridiculous nonsense.

Allow me to translate a portion of it for you.

JY:  The need to deploy an enhanced set of tools and standards to promote financial stability has been widely recognized in the aftermath of the financial crisis.

T:  In a Soviet style centrally planned economy, massive market instabilities are bound to occur.  In order to ensure banks and the government itself don’t go bankrupt, policy tools that involve spreading private banker losses to tax payers are widely regarded as being necessary.

JY:  In the United States, for example, more rigorous prudential standards will be applied to systemically important financial institutions to ensure that these firms internalize the costs of the risks they pose to the financial system and the economy. Likewise, systemically important institutions will be required to develop living wills, or plans to facilitate their resolution in the event of insolvency.

T:  In the United States, we will make a grand spectacle of holding private banks accountable for their investment losses, while at the same time we will coordinate bailout packages in the event of their insolvency.   At no point will we actually send one of the major banks into chapter 11 bankruptcy court; even though we know they are all completely insolvent as it is.

JY:  Novel tools may be needed, however, to limit–or lean against–the buildup of financial sector imbalances that span multiple institutions and markets. Approaches that have been used in other countries when policymakers determine that credit growth and risk-taking have become excessive include, for example, restrictions on underwriting practices, such as limits on loan-to-value ratios, loan-to-income ratios, and debt-to-income ratios.

T:  In a normal free market, private individuals and institutions would be allowed to freely determine loan to value and loan to income ratios between themselves, but because we have so royally fucked up the markets by printing gagillions of dollars and creating metric ass tons of moral hazard, individual lending institutions can no longer be trusted to responsibly set such ratios.  Therefore we will determine what they should be for them, because we have a crystal ball that allows us to know exactly what they should be.  We are the central planning masters of the universe!

JY:  Of course, the use of such tools must be carefully evaluated in the context of the particular imbalance that policymakers are seeking to address, and judged both on their potential benefits and potential costs.

T:  In a Soviet style centrally planned economy, policy makers determine what constitutes an “imbalanced” market.  When they decide something is “imbalanced”, such as a major corporate donor like Goldman Sachs going bankrupt, they will evaluate the political cost of bailing them out.

Praise Stalin, and may the Fed plan your 401K’s funeral.