Will faith in the dollar wane due to mistrust of The Fed?
*Barron's, by Gene Epstein, October 5, 2009
“The Sins of The Fed.
SINNING IS ONE THING, COVERING UP THOSE sins quite another. If former Federal Reserve chairman Alan Greenspan and his accomplice, current Fed Chairman Ben S. Bernanke, would acknowledge their sins, the rest of us would have a better chance of changing the system that made those transgressions possible.
Yom Kippur came and went last week with no coverage in this space of acts to be atoned for, a sin of omission that will be remedied here.
Start with forecasting sins, which are hard to cover up. Not all returns are in, of course, but 2009 will almost definitely be a down year for real gross domestic product. Yet the consensus of about 50 forecasters, tracked monthly by Blue Chip Economic Indicators, didn’t forecast a negative for real 2009 GDP until November of last year — just a month before the Business Cycle Dating Committee officially recognized the economy was in recession.
In my own case, even as late as mid-December of last year, I thought a ‘deep recession’ would be avoided. With the panic in the investment sector through the fourth and first quarters, a deep recession is exactly what we got. I also thought the second quarter would eke out small gains in real GDP, while the consensus expected small losses. The consensus was right. According to the third estimate for the second quarter released last week, real GDP fell at an annualized 0.7%.
My forecasting errors look bad enough against the consensus, which itself wasn’t so hot. The errors would look even worse if there were a consensus forecast recorded for those who subscribe to Austrian business cycle theory (ABCT), of whom I am one. The ‘Austrians’ — who almost never come from Austria, but whose chief mentors, Ludwig von Mises and F. A. Hayek, did — tend to let their anger run away with them when they forecast. As an Austrian myself, I share their anger, but have often found it makes them prefer a dour outlook.
In this case, they were quite right, and I was quite wrong.
Speaking of anger, you don’t even have to know ABCT to understand how Greenspan and Bernanke (who served as Fed governor during the crucial years 2002-2005) played crucial roles in causing the housing bubble that helped bring down the economy, despite their disgusting attempts at cover-up. Remember the adjustable-rate mortgages that drove the housing boom? Well, ARMs were so low for so long because they were tied to the federal-funds rate, which Greenspan and Bernanke kept so low for so long. Just to make sure we didn’t miss his direct involvement, Greenspan himself publicly promoted ARMs at a February 2004 speech before the national association serving credit unions.
On the other hand, if you do know ABCT, then you will understand why Greenspan and Bernanke’s greatest sin is to defend an institution that is part of the problem rather than the solution.”
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