Former U.S. Federal Reserve Chairwoman Janette Yellen expressed concerns about the next financial crisis and possible cancel of the financial reforms implemented after the crisis in 2008. She also called growing corporate debt as another source of possible threats, according to MarketWatch.
“I am worried that we are bending towards deregulation and I see a huge pressure accumulating in the system which leads to a real decline of fundamental guarantees settled by Dodd-Franc law. We lived through a decade after the latest financial crisis and that would be anxious and wrong”. - Yellen said during her speech in Washington.
One of the most important issues, according to Yellen, is related to monetary policy instruments to overcome the next recession. Despite the tightening cycle, the interest rates would stay at comparatively low levels, meaning that interest rates would not be able to solve the problem of new economic slowdown, FOMC ex-head noted.
The U.S. Federal Reserve hiked the interest rates, the fourth time this year, as it’s been widely expected. However, the monetary policy perspective is foggy.
Although Federal Reserve Chairman Jerome Powell was rather hawkish in his speech related to the economic expectations in the United States, markets kept losing confidence about the regulator will continue hiking the interest rates next year.
Answering the question about the high level of corporate debt, Yellen stated that this issue is similar to the one that caused the financial crisis in 2008.
“There were investors aiming to high-yield levels and they wanted to hold securities which they considered safe and high-yield at the same time. In such an environment with low interest rates, there are many investors seeking high yields” - she noted.
Yellen is not worried about those loans being too risky for the bank system. Nevertheless, “if the economy will face any negative shock, then the interest rates will surge much faster than it’s been previously anticipated and many corporate bankruptcies will occur, many problematic credits… many losses for investors” - Yellen warned.
She thinks that’s a risky form of borrowing and she’s cautious about the absence of any instruments for the regulator to fix this issue.