Free End Game by Matthew Glass Page B

irrational exuberance were no longer thought to be enough and the statement had been introduced as one of the responses to the failure of the Greenspan–Bernanke period of chairmanship to deal with bubbles inflating across asset markets. It remained a controversial element, much hated by Wall Street.
    Strickland continued in his customary monotone.
    ‘While we see no evidence of bubble-type activity, we remain alert to the possibility that the upside view over the short- to medium-term horizon will encourage an increasing level of activity in a number of asset classes. Pricing and volume data indicate an increasing risk appetite among certain investor segments backed by rising levels of leverage. In particular, we continue to see a notable increase in the market uptake of certain collateralized derivatives, and although these are a legitimate means of diversifying portfolio risk they also carry a systemic risk through secondary and tertiary markets and, as I have reported before, we believe could exacerbate overheating should this begin to develop. We remain particularly watchful of a number of segments of the equities derivatives markets and remain vigilant to the exposure of the banking sector, which would be a key concern should overexposure develop.’ Strickland paused portentously. ‘We will use monetary policy if overheating appears to be taking place. We will use it rapidly, decisively, and are prepared to do so.’
    Grey glanced at Malevsky. He was frowning as he gazed at the screen. Evangelou caught Grey’s eye and shrugged.
    When Strickland had finished his prepared remarks, the questions from the senators began. After a few questions one of the Democratic senators brought him back to the bubble statement.
    ‘Mr Chairman, you talked about rising risk appetite and leverage. Can you be more specific about the levels of these rises?’
    ‘If I had to characterize them, Senator, I would describe them as moderate to medium. My office can supply the data.’
    ‘That would be helpful. But I take it you’re saying you do have significant concerns at the moment.’
    ‘It depends, Senator, what you mean by significant.’
    The senator sighed impatiently. ‘I think most people would understand what I mean, Mr Chairman. It sounds as if you have significant concerns that you will need to intervene.’
    ‘Senator, let me try to be clearer. We monitor these parameters. Will the day come when we need to intervene? Logically the answer to that must be yes, because every single cycle that we have ever seen in this country has culminated in a bubble and then gone on to a bust, and part of my mandate is to ensure that we don’t get to that point again. And if without intervention we would get to that point, it stands to reason that intervention at some point will be required.’
    ‘Mr Chairman, that’s a wonderful theoretical answer.’
    ‘Thank you, sir.’
    There was a ripple of laughter from the audience.
    Strickland’s craggy face remained serious. He had little in the way of a sense of humor and hadn’t seen the irony in the senator’s compliment. Since taking the post as head of the Fed his technical and ponderous communication style had been the target of much criticism.
    ‘Mr Chairman,’ said the senator in a show of exasperation, ‘what point is there if you have concerns and don’t make the extent of these concerns known? Surely the point of these concerns is to warn unsuspecting investors in good time to help them make informed decisions. Quarter after quarter, you come before this committee and tell us you have concerns and yet you do not tell us how strong they are. If I heard you correctly, I think you’re telling us your concerns are strong. Is that correct?’
    ‘Mr Senator, I have said repeatedly, and I think I have said it again today in the clearest terms I can, that the Federal Reserve will not hesitate to act should this be required. That is a responsibility the president has laid upon me