The Federal Reserve’s FOMC released its minutes today showing that while its views on the economy of 2009 have grown darker, it still expects only a mild downturn that shrinks the economy from 0.5% to 1.3%. Our initial reaction to this was basically to scoff. We’re expecting a lot worse than a 1.3% downturn.
How can we think we know more than the geniuses at the Federal Reserve? Well, for one thing, these guys are terrible at economic forecasting. If you followed their predictions, you probably would have ended up bankrupt. Just go ask Lehman Brothers.
But don’t take our word for it. Let’s revist what the Fed’s top guy, Ben Bernanke, said about the housing crisis back in May 2007. He was reviewing the pain the subprime mortgage market was suffering, which as then at a delinquency rate at somewhere around 11 per cent (it’s closing in on 40% now). As you might expect from a trained economic historian, he does a great job of explaining what has happened. But when he tries to get predictive, things go haywire.
“All that said, given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system,” Bernanke said.
How’d that turn out? According to the government’s own measures we were in a recession just about six months later and less than a year later, the financial system started to burn down. As you know, subprime delinqencies lept from 12% to 38%. Prime mortgage delinqencies increased something like 500%.
Do we have any reason to believe that Bernanke and his buddies at the Fed have suddenly become a lot smarter about the troubles we are facing.