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Yellen Shrugs Off Bitcoin as “Full-Blown Financial Stability Risk.” In Other Words, No Fed Bailout when Prices “Fluctuate”

Summary:
As long as banks are not exposed to bitcoin. Bitcoin, after ludicrously dominating the financial media, even invaded the Federal Open Market Committee’s press conference on Wednesday. During the Q&A, Fed Chair Janet Yellen was asked about bitcoin by three different emissaries from major media operations. Those weren’t questions about bitcoin itself but about the broader “cryptocurrency” mania – “cryptocurrency” in quotes because bitcoin doesn’t, as Yellen put it so elegantly, “constitute legal tender” – and the risk it might pose to “financial stability.” This is code for a distinction: When “financial stability” is at risk, when the banking system is on the verge of collapse or when credit is freezing up or some such thing, the Fed will step in; if financial stability is not at

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As long as banks are not exposed to bitcoin.

Bitcoin, after ludicrously dominating the financial media, even invaded the Federal Open Market Committee’s press conference on Wednesday. During the Q&A, Fed Chair Janet Yellen was asked about bitcoin by three different emissaries from major media operations.

Those weren’t questions about bitcoin itself but about the broader “cryptocurrency” mania – “cryptocurrency” in quotes because bitcoin doesn’t, as Yellen put it so elegantly, “constitute legal tender” – and the risk it might pose to “financial stability.”

This is code for a distinction: When “financial stability” is at risk, when the banking system is on the verge of collapse or when credit is freezing up or some such thing, the Fed will step in; if financial stability is not at risk, the Fed will let it go. Here’s what Yellen said:

“Bitcoin at this time plays a very small role in the payment system, it’s not a stable store of value, and it doesn’t constitute legal tender.

“It’s a highly speculative asset, and the Fed doesn’t really play any role, any regulatory role with respect to bitcoin, other than assuring that banking organizations that we do supervise are attentive that they are appropriately managing any interactions they have with participants in that market, and appropriately monitoring anti-money laundering Bank Secrecy Act responsibilities that they have.”

A few minutes later came the next salvo. In response to another participant’s question about the Fed’s coming up with its own cryptocurrency, Yellen made a distinction between “digital currency” and “cryptocurrency,” with central banks only looking at digital currencies.

“There might be a central banker or two that might go in that direction. But I really want to caution that this is not something that the Federal Reserve is seriously considering at this stage.”

“While we’re looking at research on this topic, there are, I think, to my mind, limited benefits from introducing it, a limited need for it, and some substantial concerns,” she said. “So I would doubt that the Federal Reserve would soon go in that direction.”

And then, at the very end of the press conference she got badgered again, ever so gently, about “bitcoin as a potential threat to financial stability” – again that term. Was the Fed ignoring the threats from bitcoin just like the Bernanke Fed had ignored the contagion from subprime mortgages before the Financial Crisis? “So are we underestimating the risk,” the question went.

Yellen:

“I certainly agree that it’s important for the Fed to attempt to understand emerging risks to financial stability, and to be looking not just in the banking system but outside it for developments that could pose financial risks, and we are doing that….

“When you ask about bitcoin, I still see the financial stability risks from it as limited.

“Often risks threatening financial stability arise when there is exposure of the banking system to fluctuation in asset valuations, and I really don’t see any significant exposure of our core financial institutions to threats from bitcoin if its value were to fluctuate.”

The term “fluctuate” is central-bank speak for “crash.”

“I don’t see a threat to the core of our financial institutions. So undoubtedly, there are individuals who could lose a lot of money if bitcoin were to fall in price, but I really don’t see that as creating a full-blown financial stability risk.”

And there you go. If cryptocurrency hotheads are counting on a Fed bailout – such as the bond market, the stock market, the housing market, and other asset classes received since the Financial Crisis via QE and zero-interest-rate monetary policy – they’ll be disappointed.

That’s what Yellen indicated at what was her last Fed press conference before she rides off into the sunset in February. There won’t be a bailout of any asset class unless they threaten to trigger another Financial Crisis. But with cryptocurrencies that’s not going to happen because banks are not exposed. So the Fed will let them go to heck. That was the message.

Bitcoin takes over the media, in ten practically funny pictures. Read… Peak Bitcoin Media-Mania Yet?




Wolf Richter
Founder, Wolf Street Corp. In his cynical, tongue-in-cheek manner, he muses on WOLF STREET about economic, business, and financial issues, Wall Street shenanigans, complex entanglements, and other things, debacles, and opportunities that catch his eye in the US, Europe, Japan, and occasionally China.

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