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Who can we trust?

August 8, 2012

No one can predict the future, but people can make educated guesses based on current facts. Economic experts often do this, and with varying degrees of success. For example, in his 2002 letter to shareholders, Warren Buffet warned that “derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.” Unfortunately, he was right.

But some experts’ predictions and assessments are so wrong that it’s hard to believe anyone is still listening to them. In 2003, then-Fed Chairman, Alan Greenspan, told the Senate Banking Committee, “What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn’t be taking it to those who are willing to and are capable of doing so.” This was not the first, nor the last time our Federal Chairman would be so completely wrong.

Here are some other prime examples of inaccurate assessments by some of our Federal Reserve Chairmen:

Improvements in lending practices driven by information technology have enabled lenders to reach out to households with previously unrecognized borrowing capacities. This extension of lending has increased overall household debt but has probably not meaningfully increased the number of households with already overextended debt. – Alan Greenspan, October 2004

The use of a growing array of derivatives and the related application of more-sophisticated approaches to measuring and managing risk are key factors underpinning the greater resilience of our largest financial institutions …. Derivatives have permitted the unbundling of financial risks. – Alan Greenspan, May 2005

Housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise.  — Ben Bernanke, February 15, 2006

Despite the ongoing adjustments in the housing sector, overall economic prospects for households remain good. Household finances appear generally solid, and delinquency rates on most types of consumer loans and residential mortgages remain low.  — Ben Bernanke, February 15, 2007

The Federal Reserve is not currently forecasting a recession. — Ben Bernanke, January 10, 2008

One myth that’s out there is that what we’re doing is printing money. We’re not printing money. — Ben Bernanke, December 2010

So the question is, how are we supposed to trust these people, when they consistently get things wrong?

One Comment
  1. Carrie Lane permalink
    August 10, 2012 4:14 pm

    Well Jon, the Federal Reserve isn’t printing money so that is an accurate statement. They don’t have to print it anymore. They just create it electronically! Notice that he specifically said they weren’t PRINTING money. That’s a defend-able statement!

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