Back in June, Stanley Fischer, Fed Vice Chairman, made an assessment of financial stability in the United States. What can we learn from it?

On June 27, Stanley Fischer, delivered a speech entitled “An Assessment of Financial Stability in the United States” at the IMF Workshop on Financial Surveillance and Communication: Best Practices from Latin America, the Caribbean, and Advanced Economies, Washington, D.C. We know that it was a few weeks ago, but it is still relevant today.

Fischer explained that the Fed focused on four broad cyclical vulnerabilities: (1) financial-sector leverage, (2) nonfinancial-sector borrowing, (3) liquidity and maturity transformation, and (4) asset valuation pressures. He then analyzed each of these factors. Fischer argued that leverage is not a problem, since “regulatory capital at large banks is now at multidecade highs”. Similarly, he believed that “the primary vulnerability associated with liquidity and maturity transformation--that of a self-fulfilling run--is relatively low”.

Fischer also downplayed the worries about non-financial-sector borrowing, as total debt remains well below its long-run trend. It’s true that the corporate business sector appears to be notably leveraged, but “firms with high debt growth appear relatively healthy”. Last but not least, he noticed that prices of risky assets had increased recently, but high risk appetites had not lead to increased leverage across the financial system.

Hence, Fischer’s speech was cautiously optimistic. We generally agree with his remarks. There are some reasons to worry, for sure, but the U.S. financial system has improved since the crisis of 2007-2009. Paradoxically, the sluggish economic growth during this expansion strengthens this view, as it shows the lack of excessive boom and irrational exuberance. Actually, a lot investors are very cautious and skeptic about current asset valuations, which is rather not typical of the euphoria seen during speculative manias. Thus, permanent doomsayers and gold bulls should hold their horses.

However, one caveat is that while generals always fight the previous war, economists and central bankers always fight the last recession. Therefore, investors should take central bankers’ assessments with a pinch of salt. They always are too optimistic and use indicators referring to previous depressions, while the next crisis may – and probably will – hit from a completely different angle. This is why it is always reasonable to hold some gold in one’s investment portfolio.