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Former Fed Chair Janet Yellen Discusses Possibility of Future Downturn and Origins of 2008 Crisis

Former Federal Reserve Chair Janet Yellen at The Graduate Center
Former Federal Reserve Chair Janet Yellen spoke at The Graduate Center on December 10. Photo by Paula Vlodkowsky. 

Former Federal Reserve Chair Janet Yellen discussed the possibility of a future economic downturn and the origins of the 2008 financial crisis at a full-capacity event hosted this week by The Graduate Center and its Stone Center on Socio-Economic Inequality.

“Corporate indebtedness is now quite high,” Yellen said in conversation with Stone Center faculty member and Distinguished Professor Paul Krugman (Economics). “I think it’s a danger that if there’s something else that causes a downturn, that high levels of corporate leverage could prolong the downturn and lead to lots of bankruptcies in the nonfinancial corporate sector.”

Yellen, who served as the chair of the Federal Reserve from 2014 to 2018, said that many investors own corporate debt in packages similar to subprime mortgage packages, which contributed to the housing crisis and recession in 2008. Her comments received coverage from CNBC and other financial news organizations.

Graduate Center Distinguished Professor Paul Krugman
Distinguished Professor and Stone Center faculty member Paul Krugman interviewed Yellen. Photo by Paula Vlodkowsky. 

The event was part of The Graduate Center’s new series “The Promise and Perils of Democracy,” a two-year initiative exploring the present state and future of democracy around the world. Professor Janet C. Gornick, the director of the Stone Center, introduced the speakers.
 
Yellen emphasized that a crisis as severe as what the country experienced in 2008 is not likely in the near future. “I don’t see a shock in the offing that’s likely to cause that kind of financial crisis,” she said. “I think that most of those risky loans are owned by investors (who) are not leveraged. So they may suffer losses, but they’re unlikely to turn around and start selling other assets that can lead to fire-sale contagion.”
 
Krugman, reading a question from the audience, asked Yellen if rising economic inequality contributed to the 2008 crisis. “I'm certainly concerned about rising inequality, but I don’t see it as a cause of the crisis,” Yellen said. Krugman noted that deregulation may have contributed both to the crisis and to inequality.
 
Yellen said that deregulation of the financial industry remains a concern. “I’m not sure we’re working on those things in the way we should,” she said. “There remain holes, and … there’s regulatory pushback.”

Watch C-SPAN's video of the event here

Submitted on: DEC 13, 2018

Category: Economics | Faculty | General GC News | Stone Center