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Janet Yellen thinks social media is overvalued

A million dollars isn't cool. You know what's cool? Having friends online. (The Social Network/Columbia Pictures)

Fed Chair Janet Yellen has a hot stock tip for you: stop throwing so much money at anything that calls itself a social network.

Specifically, the Fed thinks the "valuation metrics" for "smaller firms in the social media" sector "appear substantially stretched." And it's not hard to see why. Yo, an app that only lets you send messages that say "yo," just received $1 million in funding. Cynk, a nonexistent social network for buying friends online, somehow—fraudulently—got a $6 billion valuation despite having no assets and no revenue. And now NBA star Carmelo is pivoting to a second career as a venture capitalist with his own seed fund. As he told the Wall Street Journal, he has "long been interested in technology."

In other words, Larry Summers was right: there are idiots, look around. But the question is how hard the Fed should look at our collective idiocy. On the one hand, it doesn't want to raise rates to pop a bubble, because, as former New York Fed president Benjamin Strong apocryphally said, that'd be like punishing all your children when one of them misbehaves. It would increase unemployment overall, and not just in the frothy sectors. And even worse, it might cause the crisis it was trying to prevent. That's what happened in 1928 when, despite low inflation, the Fed hiked rates to try to rein in what it thought was excessive speculation on Wall Street. It eventually succeeded, and then some.

But on the other hand, people like Gavyn Davies are uncomfortable with the idea of Yellen as our stock-picker-in-chief. They don't think central banks should be in the business of telling us which stocks look overvalued, and which don't. That's what markets are for.

The problem, though, is that markets haven't done such a good job of that the past 20 years. And after two burst bubbles, the Fed realizes it can't ignore the macroeconomic costs of mania anymore. Instead, it has to make the financial system stronger, with increased capital, so market crashes don't spill over into economic ones. It has to use macroprudential tools, like limiting the size of mortgages, to cool down overheated parts of the economy. And, yes, it has to call attention to asset prices that appear detached from reality. Former Fed Chair Alan Greenspan famously tried this when he said markets were caught in the grip of "irrational exuberance" back in 1996. But he wasn't specific, and he didn't follow up, even as tech stocks proceeded to go vertical. Maybe it wouldn't have mattered, but, as Dean Baker argues, it still would have been worth trying to talk markets down. After all, it's seemed to work with social media stocks the past few days.

So if you want to know which stocks to avoid, just follow the Fed on Twitter—because it won't be on Yo.