Yellen warns of new financial crisis

According to former Federal Reserve Chair Janet Yellen, there may be Another financial crisis will break out, because there are still large holes in the financial system. In a meeting in New York, she said that although supervision of banks has been tightened in recent years, there are still many areas that supervisors cannot properly anticipate.

Yellen - like her successor Jerome Powell - expressed her concerns about the large amount of leveraged loans that banks have provided in recent years. Supervisors do not have the tools to properly control these risks in the financial system. She also said the Federal Reserve has no authority to lend money directly to companies that get into trouble.

Less leeway to lower interest rates

Not only do supervisors and the central bank have too few powers to properly absorb all risks, she believes there is also less room for manoeuvre to intervene. For example, Yellen noted that interest rates in the United States are still exceptionally low and are likely to remain at low levels in the coming years. In a normal recession, the Federal Reserve typically cuts interest rates by 5 percentage points. That would mean that the central bank would have to bring interest rates well below zero in the next recession. "So there is much less room to cut short-term interest rates than in the past", Yellen said.

These statements by Yellen are remarkable, because only a year and a half ago she claimed that we would not experience another major crisis. At the time, she was still at the helm of the US central bank. That may be the reason why she is now coming out with a completely different story. Notably, she also criticizes the Federal Reserve's current policy. According to her, insufficient priority is given to closing the gaps in the supervision of the banking sector. Janet Yellen is currently affiliated with the Brookings Institution think tank.

This contribution was made from Geotrendlines