Faith in Bernake?

[Andy R]

Just like many other people, I have been trying decide which assets classes will perform well in the next few years. I was just reading this WSJ article, From Bear to Bull, and read this quote:

To the English economist Arthur C. Pigou is credited a bon mot that exactly frames the issue. "The error of optimism dies in the crisis, but in dying it gives birth to an error of pessimism. This new error is born not an infant, but a giant." So it is today. Paul A. Volcker, Warren Buffett, Ben S. Bernanke and economists too numerous to mention are on record talking down the recovery before it fairly gets started. They collectively paint the picture of an economy that got drunk, fell down a flight of stairs, broke a leg and deserves to be lying flat on its back in the hospital contemplating the wages of sin.

I am not a Bernake expert but I simply don't have much faith in the guy anymore. IMO he seems to flip flop a lot and his vision was to narrow to see the dangers that were brewing before the financial crisis hit. Here are some articles and quotes from the years leading up to the crisis:

October 2005 - Bernanke: There's No Housing Bubble to Go Bust

Many economists argue that house prices have risen too far too fast in many markets, forming a bubble that could rapidly collapse and trigger an economic downturn, as overinflated stock prices did at the turn of the century. Some analysts have warned that even a flattening of house prices might cause a slump -- posing the first serious challenge to whoever succeeds Fed Chairman Alan Greenspan after he steps down Jan. 31.

Bernanke's testimony suggests that he does not share such concerns, and that he believes the economy could weather a housing slowdown.
"House prices are unlikely to continue rising at current rates," said Bernanke, who served on the Fed board from 2002 until June. However, he added, "a moderate cooling in the housing market, should one occur, would not be inconsistent with the economy continuing to grow at or near its potential next year."

April 2006 - Federal Reserve - Outlook of the U.S. economy


Based on the information in hand, it seems reasonable to expect that economic growth will moderate toward a more sustainable pace as the year progresses. In particular, one sector that is showing signs of softening is the residential housing market. Both new and existing home sales have dropped back, on net, from their peaks of last summer and early fall. And, while unusually mild weather gave a lift to new housing starts earlier this year, the reading for March points to a slowing in the pace of homebuilding as well. House prices, which have increased rapidly during the past several years, appear to be in the process of decelerating, which will imply slower additions to household wealth and, thereby, less impetus to consumer spending. At this point, the available data on the housing market, together with ongoing support for housing demand from factors such as strong job creation and still-low mortgage rates, suggest that this sector will most likely experience a gradual cooling rather than a sharp slowdown. However, significant uncertainty attends the outlook for housing, and the risk exists that a slowdown more pronounced than we currently expect could prove a drag on growth this year and next. The Federal Reserve will continue to monitor housing markets closely.

March 2007 - The economic outlook - Before the Joint Economic Committee, U.S. Congress

The principal source of the slowdown in economic growth that began last spring has been the substantial correction in the housing market. Following an extended boom in housing, the demand for homes began to weaken in mid-2005. By the middle of 2006, sales of both new and existing homes had fallen about 15 percent below their peak levels. Homebuilders responded to the fall in demand by sharply curtailing construction. Even so, the inventory of unsold homes has risen to levels well above recent historical norms. Because of the decline in housing demand, the pace of house-price appreciation has slowed markedly, with some markets experiencing outright price declines.

The near-term prospects for the housing market remain uncertain. Sales of new and existing homes were about flat, on balance, during the second half of last year. So far this year, sales of existing homes have held up, as have other indicators of demand such as mortgage applications for home purchase, and mortgage rates remain relatively low. However, sales of new homes have fallen, and continuing declines in starts have not yet led to meaningful reductions in the inventory of homes for sale. Even if the demand for housing falls no further, weakness in residential construction is likely to remain a drag on economic growth for a time as homebuilders try to reduce their inventories of unsold homes to more normal levels.
Developments in subprime mortgage markets raise some additional questions about the housing sector. Delinquency rates on variable-interest-rate loans to subprime borrowers, which account for a bit less than 10 percent of all mortgages outstanding, have climbed sharply in recent months. The flattening in home prices has contributed to the increase in delinquencies by making refinancing more difficult for borrowers with little home equity. In addition, a large increase in early defaults on recently originated subprime variable-rate mortgages casts serious doubt on the adequacy of the underwriting standards for these products, especially those originated over the past year or so. As a result of this deterioration in loan performance, investors have increased their scrutiny of the credit quality of securitized mortgages, and lenders in turn are evidently tightening the terms and standards applied in the subprime mortgage market.

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. The ongoing tightening of lending standards, although an appropriate market response, will reduce somewhat the effective demand for housing, and foreclosed properties will add to the inventories of unsold homes. 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. In particular, mortgages to prime borrowers and fixed-rate mortgages to all classes of borrowers continue to perform well, with low rates of delinquency. We will continue to monitor this situation closely.

Now Bernake is saying the recession is technically over, OK, technically maybe. Everything else I read points to a lot more pain ahead including substantial ARM mortgages set to reset in the next 24 months, commercial real estate foreclosures dragging down banks, rising interest rates to combat inflation and stabilize the dollar (which is loosing value very quickly).

I was disappointed when Obama stated he would allow Bernake to continue for another 4 year term. Although I can't think of any other outstanding replacements (other then Buffet who would never take the role). I don't have any faith in Bernake, do you?

 

[W2R]

Faith is a pretty strong word to use unless you are talking about a deity. I don't have faith in Bernanke (or any other financial guru, really) but I listen to and weigh his opinions, along with those of many others.

I think that it would be foolish for me to predict that there will be no faltering in the recovery from here on out. It does look like we have so far begun to slowly and laboriously climb out of the big hole we were in a few months ago.

 

[ziggy29]

My concern is that Bernanke is continuing some of the Greenspan monetary policies which helped to inflate the debt and housing bubbles. On some level a little bit of support seems necessary to avoid deflationary depression, but it feels to me like he's trying to solve an excessive debt crisis by encouraging more of the debt that got us here.

I think the economy is recovering. But it won't be rapid and it won't be straight line. We may hit a double dip recession if jobs don't recover within another 3-6 months. And when a recovery takes hold, I don't see it looking like a 1982-type recovery. There are too many more economic headwinds -- the overall debt, the deficit needing higher taxes, a possible partial shift in the psyche of a significant chunk of consumers comes to mind. But barring something unforeseen, we at least avoided the potential worst-case and appear to be stabilizing.

 

[Gone4Good]

Emphatically, Yes.

The quotes you posted pretty well reflect the consensus view of economists at the time. So if you're asking "Did Bernanke see things that most other economists missed?" The answer is no. But few others got it right either (Warren Buffet included). Many of those who now claim to have predicted the crisis had been pretty much predicting a crisis for decades. That's not particularly impressive or helpful. Many are still predicting crisis . . . Rubini, for one, was saying sell stocks at SPX 700. He's not exactly the soothsayer people made him out to be. I suspect his 15 minutes are about up.

So economic forecasting is hard and fraught with errors. Bernanke doesn't seem to be a better economic forecaster than anyone else. Where he excelled, though, was in preventing the credit crisis from turning into a complete financial meltdown. I have no doubt in my mind that the end of the financial world was close at hand. Bernanke is one of the reasons it didn't happen.

 

[Andy R]

Saying that he's as bad as most economists is sad. If the majority of the time there is a bull market and the majority of the economists predict a bull market then they are mostly right. Excusing them for drinking the same cool aid and not looking at fundamental signals that issues are brewing is not right.

Regardless if the CPR on the financial system worked, the doctor should have notice the patient was grossly overweight and suggested preventative measure before the heart attack happened. This was evident when housing prices moved so far off their long term standard deviation for appreciation.

When average Joes, living in average houses, making an average salaries are buying million dollar homes, something isn't right.

I saw this video, it reminded me of this thread and it scared me just like Helicopter Ben does.

YouTube - Alan Grayson (High Quality Version): Is Anyone Minding the Store at the Federal Reserve?

 

[DblDoc]

I'm with YrstoGo on this one. We were very fortunate to have an expert on the Great Depression in place when this crisis began who a) had thought long and hard on what to do and probably more important what NOT to do and b) be ready and willing to think outside the box.

Say he was prescient and could see what could happen. What, as Fed Chairman, could he have done to prevent it? His tools and areas of oversight are limited. Raise interest rates? Hmmm, wonder what that would have done to the real estate bubble...

Hopefully this shock to the system will result in some meaningfull changes and oversight but I wouldn't hold my breath. I think we are in for a prolonged and slow recovery. What does that mean in terms of my investments? Nothing. Continue holding a well diversified, low expense portfolio managed for my level of risk tolerance and need for risk.

DD

 

[Gone4Good]

Regardless if the CPR on the financial system worked . . .

"So aside from that, how was the rest of the play Mrs. Lincoln."