Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Best AI Tech Stocks ETF and Investment Trusts - 19th Oct 21
Gold Mining Stocks: Will Investors Dump the Laggards? - 19th Oct 21
The Most Exciting Medical Breakthrough Of The Decade? - 19th Oct 21
Prices Rising as New Dangers Point to Hard Assets - 19th Oct 21
It’s not just Copper; GYX indicated cyclical the whole time - 19th Oct 21
Chinese Tech Stocks CCP Paranoia, VIES - Variable Interest Entities - 19th Oct 21
Inflation Peaked Again, Right? - 19th Oct 21
Gold Stocks Bouncing Hard - 19th Oct 21
Stock Market New Intermediate Bottom Forming? - 19th Oct 21
Beware, Gold Bulls — That’s the Beginning of the End - 18th Oct 21
Gold Price Flag Suggests A Big Rally May Start Soon - 18th Oct 21
Inflation Or Deflation – End Result Is Still Depression - 18th Oct 21
A.I. Breakthrough Could Disrupt the $11 Trillion Medical Sector - 18th Oct 21
US Economy and Stock Market Addicted to Deficit Spending - 17th Oct 21
The Gold Price And Inflation - 17th Oct 21
Went Long the Crude Oil? Beware of the Headwinds Ahead… - 17th Oct 21
Watch These Next-gen Cloud Computing Stocks - 17th Oct 21
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Ben Bernanke Economic Forecasts Proven to be Incredibly, Uncannily Wrong

Economics / Central Banks Aug 02, 2009 - 09:36 AM GMT

By: MISES

Economics

Best Financial Markets Analysis ArticleWe now have the diametrical opposite of the famous "Peter Schiff Was Right" video (a compilation of 2006 and 2007 clips in which Schiff, a financial expert who subscribes to Austrian economics, predicted the deep recession that would follow the bursting of the housing bubble).


The new, opposite video is a compilation of the 2005–2007 prognostications of Federal Reserve Chairman Ben Bernanke. In it, Bernanke is shown to have been just as embarrassingly wrong as Schiff was uncannily right.

Could their differences in economic understanding have anything to do with this remarkable dichotomy? I have transcribed most of the video, and offer my own comments interspersed with it.

July 2005

INTERVIEWER: Ben, there's been a lot of talk about a housing bubble, particularly, you know [inaudible] from all sorts of places. Can you give us your view as to whether or not there is a housing bubble out there?

BERNANKE: Well, unquestionably, housing prices are up quite a bit; I think it's important to note that fundamentals are also very strong. We've got a growing economy, jobs, incomes. We've got very low mortgage rates. We've got demographics supporting housing growth. We've got restricted supply in some places. So it's certainly understandable that prices would go up some. I don't know whether prices are exactly where they should be, but I think it's fair to say that much of what's happened is supported by the strength of the economy.

This is not only wrong in hindsight; it's a complete misunderstanding of the issue. Bernanke said that the housing boom was fine because it was supported by, among other things, growth in jobs, incomes, and in the economy in general. But that very growth itself was supported by the housing boom! For example, most of the job growth was in the housing sector. Witness Bernanke's amazing levitating economy: its housing sector is held up by economic growth, which is held up by its housing sector. And it's just as ridiculous that he denied the existence of a housing bubble by pointing to low mortgage rates. The low rates were a chief cause of the housing bubble, and were a direct result of his actions as Federal Reserve chairman.

July 2005

INTERVIEWER: Tell me, what is the worst-case scenario? Sir, we have so many economists coming on our air and saying, "Oh, this is a bubble, and it's going to burst, and this is going to be a real issue for the economy." Some say it could even cause a recession at some point. What is the worst-case scenario, if in fact we were to see prices come down substantially across the country?

BERNANKE: Well, I guess I don't buy your premise. It's a pretty unlikely possibility. We've never had a decline in house prices on a nationwide basis. So what I think is more likely is that house prices will slow, maybe stabilize: might slow consumption spending a bit. I don't think it's going to drive the economy too far from its full employment path, though.

As Peter Schiff pointed out in his speech "Why the Meltdown Should Have Surprised No One," while it is true that up until the housing crash, house prices hadn't gone down on a nationwide basis, it's also true that they had never risen so precipitously before either. Bernanke's argument is akin to getting someone drunk for the first time, putting them in a car, and then saying, "He'll be fine; he's never been in a car accident before."

That interview continued:

INTERVIEWER: So would you agree with Alan Greenspan's comments recently that we've got some areas of that country that are seeing froth, not necessarily a national situation, but certainly froth in some areas?

BERNANKE: You can see some types of speculation: investors turning over condos quickly. Those sorts of things you see in some local areas. I'm hopeful — I'm confident, in fact, that the bank regulators will pay close attention to the kinds of loans that are being made, and make sure that underwriting is done right. But I do think this is mostly a localized problem, and not something that's going to affect the national economy.

Bernanke's Fed itself created the false signals that led to vast disruptions in the housing market. Speculators try to see through those disruptions and anticipate how prices will change as valuation mistakes are corrected in order to profit from them. In fact, their speculation is part of the correction process. If their speculation is on the mark, it speeds up the price-correction process. If it's wrong, then the consequences are on their heads. Speculation is nothing but high-uncertainty entrepreneurship; and entrepreneurship is how optimal prices are found and markets clear. It was the Fed under Bernanke himself, and his predecessor Alan Greenspan, that created the price disruption and high uncertainty that made speculation profitable in the first place.

November 2006

BERNANKE: This scenario envisions that consumer spending, supported by rising incomes and the recent decline in energy prices, will continue to grow near its trend rate and that the drag on the economy from the [inaudible] housing sector will gradually diminish. The motor vehicles sector may already be showing signs of strengthening. After having cut production significantly in recent months, in response to the rise in inventory of unsold vehicles, automakers appear to have boosted the assembly rate a bit in November, and they have scheduled further increases for December. The effects of the housing correction on real economic activity are likely to persist into next year, as I've already noted. But the rate of decline in home construction should slow as the inventory of unsold new homes is gradually worked down.

Here we have the Keynesian fallacy (which I have written about here) that consumer spending, in and of itself, creates general increases in wealth. And note the irony in Bernanke applauding the boost in automotive production: the products accumulated during that boost turned out just to be more malinvestment to be liquidated or bailed out when Chrysler and GM collapsed.

February 2007

BERNANKE: We expect moderate growth going forward. We believe that if the housing sector begins to stabilize, and if some of the inventory corrections still going on in manufacturing begin to be completed, that there's a reasonable possibility that we'll see some strengthening in the economy sometime during the middle of the new year.

Our assessment is that there's not much indication at this point that subprime mortgage issues have spread into the broader mortgage market, which still seems to be healthy. And the lending side of that still seems to be healthy.

For Bernanke, healthy lending is the same thing as "a lot of lending." This dovetails with his statement in the first interview, hailing low mortgage rates as a self-evidently good thing. He has no conception of an equilibrium interest rate determined by society's average time preference, so bubbles will always surprise him. For more on this calamitous gap in Bernanke's understanding, see "Manipulating the Interest Rate: a Recipe for Disaster" by Thorsten Polleit.

July 2007

BERNANKE: The pace of home sales seems likely to remain sluggish for a time, partly as a result of some tightening in lending standards, and the recent increase in mortgage interest rates. Sales should ultimately be supported by growth in income and employment, as well as by mortgage rates that, despite the recent increase, remain fairly low relative to historical norms. However, even if demand stabilizes as we expect, the pace of construction will probably fall somewhat further, as builders work down the stocks of unsold new homes. Thus, declines in residential construction will likely continue to weigh on economic growth in coming quarters, although the magnitude of the drag on growth should diminish over time. The global economy continues to be strong, supported by solid economic growth abroad. U.S. exports should expand further in coming quarters. Overall, the U.S. economy seems likely to expand at a moderate pace over the second half of 2007, with growth then strengthening a bit in 2008 to a rate close to the economy's underlying trend.

Strengthening in 2008? Perhaps the biggest confirmation ever of Rockwell's Law: always believe the opposite of what government officials tell you.

Bernanke's own words, in light of how the crisis developed, are a testament to much more than his own personal failings as a forecaster and policy maker. They demonstrate the complete inadequacy of mainstream macroeconomics in its present state, devoid as it is of the essential insights of the Austrian School. They also reveal the folly of the very idea of giving a single man and his institution the power to centrally plan the most important price in the economy: the rate of interest. Make no mistake: the present economic crisis was brought on by central planning. It is unsettling to think that the fellow in the new video who so badly misread an economy on the brink is arguably the most powerful central planner in the world.

But even the most powerful and sequestered bureaucrat is not completely invulnerable. The Federal Reserve Transparency Act and the End the Fed movement have ruffled the Fed's feathers enough that Bernanke actually felt the need to address the public in a "townhall forum" to be broadcast on the News Hour. According to NPR,

after the forum was over, a Fed employee passed out souvenirs, an unintended metaphor perhaps for what some fear Bernanke's aggressive policies may eventually do to the currency: shredded cash.

The Fed employee, who apparently suffers from a defective sense of irony, was even recorded saying, "Here, you want money?" and, "Here's some free shred folks, thanks for coming by, we appreciate it,"

No, no, thank you and your boss, Mr. Fed employee. Within the space of days, we've been provided, courtesy of the Fed itself, with footage that perfectly distills the complete failure of Fed forecasting and planning, and audio that encapsulates splendidly the only thing that the Fed actually accomplishes: the destruction of money.

Lilburne is a teacher and writer based in San Francisco. He writes about economics, history, education, and philosophy at his blog Summa Anthropica. Send him mail. See his article archives. Comment on the blog.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

christian
02 Aug 09, 18:39
Bernake isn't TRYING to be right during times of turmoil

Bernanke was trying to manage perceptions

edit to add no one could really have gotten all that went on right with all the manipulations.....the timing of the shoes dropping...etc.....even if anyone with a brain new things were headed into the duldrums.

Bernanke can't go on CNBC and say "hey guys we are facing a crap-storm the likes of which we have never seen....this subprime contagion will spread like wild fire......it is not politically acceptable to tell the truth in finance.....that should be abundantly clear to anybody with a brain.......and a juvenile understanding of the conflict of intrest between big industry...politicians.....wall street the "fed" and the "regulators".......it's a giant mess that we just hope can function well enough not to bring us into a third world living standard......


Post Comment

Only logged in users are allowed to post comments. Register/ Log in