The media recently has lauded Janet Yellen, Obamaâ??s choice to become the next Fed chairman, for her prescient warnings in the mid-2000s that the housing bubble could cause a financial crisis. For example, Alan Blinder wrote in the Wall Street Journal, Janet Yellen â??warned, as early as 2005, that the titanic real-estate market was heading for an iceberg.â?
Really? In a speech in October, 2005, at the Haas School of Business in San Francisco, Yellen sought to answer three basic questions about the real-estate bubble: â??First, if the bubble were to deflate on its own, would the effect on the economy be exceedingly large? Second, is it unlikely that the Fed could mitigate the consequences? Third, is monetary policy the best tool to use to deflate a house-price bubble? My answers to these questions, in the shortest possible form, are â??no,â?? â??no,â?? and â??no.â??â?
She finally concluded that the housing bubble â??could be large enough to feel like a good-sized bump in the road, but the economy would likely to be able to absorb the shock.â?
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