2009 May 24 Sunday
The Optimism Of Our Economic Leaders

When high government officials tell you that we are about to turn the corner with the economy keep in mind their past performance. On April 20, 2007 then Treasury Secretary Hank Paulson said that the housing market problems had reached their worst.

"I don't see (subprime mortgage market troubles) imposing a serious problem. I think it's going to be largely contained," he added.

People want to believe that those in power are in control, understand what is going on, and the big bosses know what they are doing. Most people want to have faith in their leaders. But reality shows this faith is unjustified.

After seeing that quote I went looking for more. Here's a history of quotes from Fed chairman Ben Bernanke and Hank Paulson.

March 28th, 2007 – Ben Bernanke: "At this juncture . . . the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained,"

April 20th, 2007 – Paulson: "I don't see (subprime mortgage market troubles) imposing a serious problem. I think it's going to be largely contained." , "All the signs I look at" show "the housing market is at or near the bottom,"

May 17th, 2007 – Bernanke: “While rising delinquencies and foreclosures will continue to weigh heavily on the housing market this year, it will not cripple the U.S.”

February 29th, 2008 – Bernanke: "I expect there will be some failures. 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."

I also quite like Federal Reserve governor Frederic Mishkin on April 20, 2007. Stabilization of housing demand! Bottoming out!

"We do see some stabilization of demand in the housing market ... there is some indication that the market could be bottoming out."

In May 2008 Hank Paulson foresaw an economic recovery in the second half of 2008 as the financial crisis was supposedly behind us!

"Although we are still working through housing and capital markets issues, and expect to be doing so for some time, we also expect to see a faster pace of economic growth before the end of the year," he said.

Paulson said that both the ability to obtain loans and investor confidence are gradually improving, raising hopes that the financial market crisis which hit last August was beginning to recede.

"We are seeing signs of progress as capital markets and credit markets stabilize," Paulson said. "The markets are considerably calmer now than they were in March."

We need more comparisons of what leaders predict versus what actually happens.

More happy days from Paulson.

Update: On April 11, 2007 Chicago Fed President Michael Moskow had no idea what was in store.

"So far this year inflation has been somewhat elevated, highlighting the risk that inflation could stay stubbornly high.

"For the balance of 2007, economic growth likely will average modestly below potential. But I expect that growth will be picking up gradually over the coming quarters and return to near potential by 2008."

Near potential by 2008. Okay, but he just didn't know what that potential was: the potential for economic disaster.

The Fed member quotes at that link all focused on the fear of inflation. We are of course in the grip of deflation 2 years later. The reason financial experts do not seem so wrong most of the time is that most of the time the economy doesn't deviate that far from long term trends. So their incorrect guesses end up being wrong by smaller amounts. But these are all guesses.

You might think that Paulson couldn't have foreseen the disaster in the spring of 2007. Well, obviously he couldn't. But once problems became much worse in May 2008 Paulson painted a rosy picture for the latter part of 2008. We all know how that turned out.

"Although we are still working through housing and capital markets issues, and expect to be doing so for some time, we also expect to see a faster pace of economic growth before the end of the year," he said.

Coming to the end of the housing bubble Paulson in May 2008 foresaw the resumption of the housing bubble.

"In my judgment, we are closer to the end of the market turmoil than the beginning," he said. "Looking forward, I expect that financial markets will be driven less by the recent turmoil and more by broader economic conditions and, specifically, by the recovery of the housing sector."

Treasury Secretaries should not try predicting the course of the US economy. They don't know how.

Update II: But also beware of pessimists like Paul Krugman who predict more recessions than actually happen.

Update III: Another piece of current optimistic conventional wisdom: inflation is not a threat. Simon Johnson thinks the optimistic view about inflation might be unjustified. My take: the US government is on a spending binge that must be destroying wealth. Dollars spent by a government in a hurry are unlikely to promote much wealth-creating activity. So US productive capacity is probably being harmed. This makes inflation more likely since it reduces the ability to make goods for all the dollars that are being generated by the Fed. Says Johnson:

In all these respects, the United States showed itself to be much more like a middle-income emerging market than the prevailing orthodoxy thought possible. Our financial sector became supersized, took on too much risk, received the mother of all bailouts, and we still struggle to recover from the ensuing instability. What if our inflation dynamics have also changed to become more like those of Argentina, Russia or Ukraine?

Share |      By Randall Parker at 2009 May 24 10:25 PM  Economics Disasters


Comments
James Bowery said at May 24, 2009 11:38 PM:

One of my favorites in this vein is Adam Davidson's interview of Elizabeth Warren in which he tells her she is alone in thinking there should be more TARP money directly targeted toward helping the insolvent middle class. For some odd reason, he neglects to mention that she was also alone among the mid-Atlantic elite in predicting the mortgage meltdown.

You have to wonder what the word "leader" means if it doesn't mean being ahead of the pack in seeing things coming.

kurt9 said at May 25, 2009 9:23 AM:

The people quoted in this blog post are obvious idiots. The people who called it right are those like Nouriel Roubini, Jim Rogers, and Peter Schiff.

Ned said at May 25, 2009 1:24 PM:

Here's a good one:

August 11, 1928

"Unemployment in the sense of distress is widely disappearing. . . . We in America today are nearer to the final triumph over poverty than ever before in the history of any land. The poor-house is vanishing from among us. We have not yet reached the goal, but given a change to go forward with the policies of the last eight years, and we shall soon with he help of God be in sight of the day when poverty will be banished from this nation. There is no guarantee against poverty equal to a job for every man. That is the primary purpose of the economic policies we advocate:

—Herbert Hoover, speech accepting the Republican nomination, Palo Alto, California.

MarkA said at May 25, 2009 3:26 PM:

Although it might cause the rolling of eyeballs to a certain extent the job of the Treasury Secretary and Fed Chairman is to inspire confidence and maintain stability in the financial system and the economy. If Geithner or Bernanke came out and stated that they expected bad things then this in itself could increase the likelihood of those bad things happening - eg. statements to the effect the financial system was teetering on financial collapse or that they expected hyper-inflation could be self-fulfilling prophesies (assuming these things weren't inevitable). The more interesting question to me is whether they believe in private what they say in public. I hope they don't but suspect they do to a worrying extent.

I'm a bear in bears clothing but does anyone have any thoughts on the percentage of high-profile bulls out there that might be bears in bulls clothing?

tommy said at May 25, 2009 7:48 PM:

f Geithner or Bernanke came out and stated that they expected bad things then this in itself could increase the likelihood of those bad things happening - eg. statements to the effect the financial system was teetering on financial collapse or that they expected hyper-inflation could be self-fulfilling prophesies (assuming these things weren't inevitable).

On the other hand, the more they guess wrong, the more they lose any credibility when saying positive things about the economy later.

Stephen said at May 25, 2009 8:43 PM:

Economics is not a science as demonstrated by its poor predictive value. If it were predictive, then those sage economists would have been playing the market during the collapse and by now would be mult-billionaires.

All of these guys (whether bears or bulls) are just delving around in the entrails.

Stephen said at May 25, 2009 8:46 PM:

If I were king for a day, I would require every economist making a prediction to invest their life savings accordingly.

Audacious Epigone said at May 27, 2009 9:31 AM:

Brilliant post. There is a huge need for the record of pundits and prognosticators to be reveiewed more frequently than it is.

Julian said at May 28, 2009 10:15 AM:

These people are the shepherds and we are the sheep. Their job is to calm the herd.


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