Exposing Ben Bernanke’s Fatal Conceit

In Fatal Conceit : The Errors of Socialism, the great F.A. Hayek wrote the following:

The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design. To the naive mind that can conceive of order only as the product of deliberate arrangement, it may seem absurd that in complex conditions order, and adaptation to the unknown, can be achieved more effectively by decentralizing decisions and that a division of authority will actually extend the possibility of overall order. Yet that decentralization actually leads to more information being taken into account.

Below is a collection of some of US Federal Reserve Chairman Ben Bernanke’s monumental blunders which essentially validates Hayek’s observations.

From Center for Economic Policy and Research (all bold highlights mine, italics original) [ht Bob Wenzel]. Behold the wonders of analysis derived from econometrics.

10/1/00 – Article published in Foreign Policy Magazine
A collapse in U.S. stock prices certainly would cause a lot of white knuckles on Wall Street. But what effect would it have on the broader U.S. economy? If Wall Street crashes, does Main Street follow? Not necessarily.

7/1/05 – Interview on CNBC
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.

7/1/05 – Interview on CNBC
INTERVIEWER: Tell me, what is the worst-case scenario? We have so many economists coming on our air 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 what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though.

10/20/05 – Testimony before the Joint Economic Committee, Congress
House prices have risen by nearly 25 percent over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong economic fundamentals.

11/15/05 – Confirmation Hearing before Senate Banking Committee
SEN. SARBANES: Warren Buffet has warned us that derivatives are time bombs, both for the parties that deal in them and the economic system. The Financial Times has said so far, there has been no explosion, but the risks of this fast growing market remain real. How do you respond to these concerns?

BERNANKE: I am more sanguine about derivatives than the position you have just suggested. I think, generally speaking, they are very valuable… With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly. The Federal Reserve’s responsibility is to make sure that the institutions it regulates have good systems and good procedures for ensuring that their derivatives portfolios are well-managed and do not create excessive risk in their institutions.

3/6/07 – At bankers’ conference in Honolulu, Hawaii… as delinquencies in the subprime mortgage sector rise
The credit risks associated with an affordable-housing portfolio need not be any greater than mortgage portfolios generally.

3/28/07 – Testimony before the Joint Economic Committee, Congress
Although the turmoil in the subprime mortgage market has created severe financial problems for many individuals and families, the implications of these developments for the housing market as a whole are less clear…At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.

5/17/07 – Remarks before the Federal Reserve Board of Chicago
...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. The vast majority of mortgages, including even subprime mortgages, continue to perform well.

8/31/07 – Remarks at the Fed Economic Symposium in Jackson Hole
It is not the responsibility of the Federal Reserve--nor would it be appropriate--to protect lenders and investors from the consequences of their financial decisions. But developments in financial markets can have broad economic effects felt by many outside the markets, and the Federal Reserve must take those effects into account when determining policy.

1/10/08 – Response to a Question after Speech in Washington, D.C.
The Federal Reserve is not currently forecasting a recession.

2/27/08 – Testimony before the Senate Banking Committee
I expect there will be some failures [among smaller regional banks]… Among the largest banks, the capital ratios remain good and I don’t anticipate any serious problems of that sort among the large, internationally active banks that make up a very substantial part of our banking system.

4/2/08 – New York Times article after the collapse of Bear Stearns
“In separate comments, Mr. Bernanke went further than he had in the past, suggesting that the Fed would remain aggressive and vigilant to prevent a repetition of a collapse like that of Bear Stearns, though he said he saw no such problems on the horizon.”

6/10/08 – Remarks before a bankers’ conference in Chatham, Massachusetts
The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so.

7/16/08 – Testimony before House Financial Services Committee
[Fannie Mae and Freddie Mac are] adequately capitalized. They are in no danger of failing… [However,] the weakness in market confidence is having real effects as their stock prices fall, and it’s difficult for them to raise capital.

9/24/08 – Response to a question after JEC testimony… during the TARP debate, two weeks before the Fed initiates its liquidity facility for commercial paper markets
I see the financial markets as already quite fragile. The credit markets aren’t working. Corporations aren’t able to finance themselves through commercial paper. Even if the situation stayed as it did today, that would be a significant drag on the economy.

3/16/09 – Interview on CBS’s 60 Minutes
It’s absolutely unfair that taxpayer dollars are going to prop up a company (AIG) that made these terrible bets, that was operating out of the sight of regulators.

5/5/09 – Response to Questioning at Senate Joint Economic Committee Hearing
The forecast we have is for the economy, in terms of growth, to begin to turn up later this year, but initially not to grow at the rate of potential, which means that unemployment and resource slack will continue to rise into 2010. We think that the unemployment rate will probably peak early in 2010 and then come down relatively slowly after that. Um, currently, we don’t think it’s going to get to 10 percent, we’re somewhere in the 9’s, but clearly, that’s way too high.

7/21/09 – Testimony before the House Committee on Financial Services
A perceived loss of monetary policy independence could raise fears about future inflation, leading to higher long-term interest rates and reduced economic and financial stability.