NY Fed Issues Mea Culpa That Nobody Saw at 6PM on Black Friday

ilene's picture

NY Fed Issues Mea Culpa That Nobody Saw at 6PM on Black Friday

Courtesy of Lee Adler of the Wall Street Examiner 

In a report released on Black Friday around 6 PM, when nobody is around, let alone paying attention, except for crazy people like me, the NY Fed posted a mea culpa on just how lousy its economic forecasts have been, a function which I had already performed over a year ago (The Fed - Clueless, Delusional, or Both?). The author of the report stated the crux of the failure thusly:

One source for such metrics is a paper by Reifschneider and Tulip (2007). They analyzed the forecast error performance of a range of public and private forecasters over 1986 to 2006 (that is, roughly the period that most economists associate with the Great Moderation in the United States).

On the basis of their analysis, one could have expected that an October 2007 forecast of real GDP growth for 2008 would be within 1.3 percentage points of the actual outcome 70 percent of the time. The New York Fed staff forecast at that time was for growth of 2.6 percent in 2008. Based on the forecast of 2.6 percent and the size of forecast errors over the Great Moderation period, one would have expected that 70 percent of the time, actual growth would be within the 1.3 to 3.9 percent range. The current estimate of actual growth in 2008 is -3.3 percent, indicating that our forecast was off by 5.9 percentage points.

Using a similar approach to Reifschneider and Tulip but including forecast errors for 2007, one would have expected that 70 percent of the time the unemployment rate in the fourth quarter of 2009 should have been within 0.7 percentage point of a forecast made in April 2008. The actual forecast error was 4.4 percentage points, equivalent to an unexpected increase of over 6 million in the number of unemployed workers. Under the erroneous assumption that the 70 percent projection error band was based on a normal distribution, this would have been a 6 standard deviation error, a very unlikely occurrence indeed.

He then went on to enumerate the 3 big reasons the Fed had gotten it wrong:

  1. Misunderstanding of the housing boom. Staff analysis of the increase in house prices did not find convincing evidence of overvaluation (see, for example, McCarthy and Peach [2004] and Himmelberg, Mayer, and Sinai [2005]). Thus, we downplayed the risk of a substantial fall in house prices. A robust approach would have put the bar much lower than convincing evidence.
  2. A lack of analysis of the rapid growth of new forms of mortgage finance. Here the reliance on the assumption of efficient markets appears to have dulled our awareness of many of the risks building in financial markets in 2005-07. However, a March 2008 New York Fed staff report by Ashcraft and Schuermann provided a detailed analysis of how incentives were misaligned throughout the securitization process of subprime mortgages--meaning that the market was not functioning efficiently.
  3. Insufficient weight given to the powerful adverse feedback loops between the financial system and the real economy. Despite a good understanding of the risk of a financial crisis from mid-2007 onward, we were unable to fully connect the dots to real activity until 2008. Eventually, by building on the insights of Adrian and Shin (2008), we gained a better grasp of the power of these feedback loops.

He then added that perhaps the biggest reason for the failure was "complacency," with which I heartily concur, but to which I would also add hubris and stupidity.

At the beginning of the piece the author cited a Turbotax Tim Geithner quote: Our best plan is to plan for constant change and the potential for instability, and to recognize that the threats will constantly be changing in ways we cannot predict or fully understand.

Adding to that the author wrote, "The quotations from Keynes and Geithner at the start of this post capture the importance of constantly striving to ensure that policy is robust to unexpected events. As explained in much of the recent work of the 2011 Nobel Prize-winning economist Tom Sargent, the unexpected events for which policymakers need to make provision have the characteristic of being the most likely unlikely bad event. The collapse in housing prices and its propagation to the economy certainly fit this description."

This is what I would call the "Nobody could have foreseen" fallacy, a tool often used by the professional economist and economic pundit class. I guess that I and the countless thousands of others who frequented this and other bearish websites at the time of the top of the housing bubble, who did foresee what was coming, must be the "nobody" that the pros refer to.

It's good to be nobody or not so good, because even though nobody took precautions, nobody ultimately took the hit. Because in this case, nobody was prepared for what happened, and nobody took steps to both protect and profit from it, while the rest of the Wall Street seers and the Fedheads, who are all somebody, didn't foresee it. As a result somebody got their asses kicked. But that hasn't stopped them, because Uncle Sam bailed them out, spending nobody's money, and nobody's children's and grandchildren's futures to do it. So in that sense, it's better to be somebody, even though somebody initially took the loss that nobody saw coming, until the US government bailed them out on behalf of nobody.

All kidding aside, I wrote the following comment on the NY Fed Liberty Street blog. I don't know if it will still be there in the morning, so here it is.

The excuse that most other professional forecasters didn't foresee it is just that, an excuse. Some professional forecasters did see it. They were derided as Cassandras and dismissed by Wall Street and Fed insiders, who are only beholden to each other, and to their own delusions.

Millions of amateur economic forecasters who frequented the financial message boards and blogs saw what was happening and what was coming. They had one important advantage. They live in the real world, not inside the Beltway, not within the marble halls and equally hardened thought processes of the Fed, and not in the ivory towers of academia, a word which sounds like a disease, because it is a disease. Not only do these environments cause delusional thinking, they attract delusional people. The same is true of policy makers.

I call it elitist personality disorder. It leads to delusions of grandeur, delusions of omniscience and omnipotence, and the unwillingness to take responsibility for failure and incompetence, instead engaging in blame shifting.

Postscript. Yep, less than a half hour later, they pulled my comment. I left a subsequent comment which isn't fit for a family oriented website like this one.


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Muddy1's picture

I don't think it's the Rove doctrine.  James Carville and Bill Clinton used it very effectively against daddy Bush during Clinton's first presidential run.  Remember:"the worst economy in 50 years"?  Perhaps it is the Carville doctrine.  If I really gave a f*** I could probably go back and find other politicians using the same tactic.  They're a bunch of lying whores who take our money and screw us.  Before someone asks, No, it wasn't good for me.

Smiddywesson's picture

It's easier to admit you made one little mistake than to recognize that your whole academic field is nonsense, and you are nothing but a paid huckster and a whore who makes the raping of the public possible.

nmewn's picture

lol...only in academia & government are 30%-60% negative revisions deemed acceptable margins of error.

LongBallsShortBrains's picture

Academia and government


andy_pandy's picture

Is the Feds "gnashing of teeth" all part of their public reformation to open the way for virtuosity by expressing some feelings of guilt. Thats right guilt as in guilty as in accountable. Yes but no, their trangressions fit neatly into the bottom drawer, occasionally read by some searching academics.

It goes to show that the Fed has as much insight into the "ding und sich" of the economy rumblings as the rest of us, and given the resources at their disposal, exercising VERY POOR governance of the REAL economy

I have been a telecoms contractor since the 1980s and like many, have been battered by multiple recessions but even I, lets say call me IDIOT, yes

IDIOT saw and learnt from the tech bubble implosion 2001 and did not take on more debt...


so whats the Feds excuse?






maddogs's picture

Yep, misdirection......nothing about their mandate to oversight of their primary dealers, nothing about lack of credulty of the Advisory comittee,,,nothing at all but "we blew the game". I take it as an admittance they are lacking the competance nesessary to function at the level their responsibility. Like SEC or CFTC or others below them which the FED does niether Vet or oversight, the FED is admiting they cannot do other than guide money supply... without any structure to asertain compentancy of understanding except after.. They simply are guessing...Because the supply is out of their control once entered into the system........it's somebody elses fault.

I'm amazed of the paralell to an organized crime entity structure. Except there, When thing get Fubar, Heads roll and Corn Fields get fertilized.

These comments from the FED seem to be quaint, in that 2012 may well have them headed out the door.

HedgeYourself's picture

This article also includes a couple of instances of some that "saw it coming":


gmj's picture

Here's a warning from September of 2006, well worth reading:


GMadScientist's picture

Misunderstanding of the housing boom. Staff analysis of the increase in house prices did not find convincing evidence of overvaluation (see, for example, McCarthy and Peach [2004] and Himmelberg, Mayer, and Sinai [2005]). Thus, we downplayed the risk of a substantial fall in house prices. A robust approach would have put the bar much lower than convincing evidence.

They can't even admit that they got it wrong correctly. What good is a mea culpa with another failed analysis?

It's telling that they believe need to lower the bar, and not just find the readily available avidence that was right under their noses.

unirealist's picture

Illyia mentioned Puplava's prescient series.  I'm a bit surprised it's slipped into the black hole of "Nobody saw it coming" because he sure did.

I warned my siblings about the coming housing crash in 2003.  But what IS TRUE, I think, is that none of us realized the incredible depth and breadth of the corruption and rot that permeated the securitization process, with what MERS was up to, and how truly global the problem had become.

Bring back the guillotine. 

Kayman's picture

Greenspan and Bernanke:

We lit a fire. We poured all the gasoline we could print onto the fire.  And the house "unexpectedly" burned down.

Boy.  I am convinced.  Barf...

unirealist's picture

Hey, I re-posted it for you.

Screw 'em.

cossack55's picture

Have the criminals pulled your followup msg yet? Wish you would post it here since I don't want to be placed on another "list" while visiting to satan's website.  I am the only one in the family who ever visits ZH, so no children will be endangered.

Element's picture

Too many references to moobell prizes and prephesional EekONomisseds ... almost projectile puked.

I need some more angels



honestann's picture

Everything the predators-that-be and predator-class say is a bald faced lie.  They never believed their own forecasts.  They knew perfectly well they were blowing a real-estate bubble, and they were doing so on purpose.  They may have been slightly wrong about when the bubbles they blow will pop, but they know perfectly well what they're doing, because they're taking huge, massively leveraged advantage of the dislocations they cause... all the way up, and all the way down.  The only reason some of them got caught with big losses is, they miscalculated their ability to find enough suckers to buy their hot potato trasshets when the reversal came.

Everything they say in public, and even in private documents that might someday be released, is pure propaganda to manipulate others and/or rationalize and justify their predatory actions.

Nobody For President's picture

"Postscript. Yep, less than a half hour later, they pulled my comment. I left a subsequent comment which isn't fit for a family oriented website like this ne."

+5 Family oriented website like this one.

Hehehehe. Now THAT must've been a POST!

cowsense's picture

It's not possible for the keynes worshipers to believe in themselves without a certain amount of insanity. They believe that they have built an anti-gravity machine when it's just an airplane and the airplane is out  of fuel. They have to be unstable.

wharfdaddy's picture

"Government has coddled, accepted, and ignored white collar crime for too long," he testified. "It is time the nation woke up and realized that it's not the armed robbers or drug dealers who cause the most economic harm, it's the white collar criminals living in the most expensive homes who have the most impressive resumes who harm us the most. They steal our pensions, bankrupt our companies, and destroy thousands of jobs, ruining countless lives"

Harry Marcopolis

...a little old fashioned bloodletting seems appropriate these days....that might get their attention....

MissCellany's picture

"Harry Marcopolis"

In case anyone wanted to google his name, it's spelled Markopolos.

CH1's picture

Government is white collar crime, and the pinnacle of it.

Temporalist's picture

I like that.  It makes me want to be a central banker. I'd get to say things like "I gave you this weapon you asked for, and neither of us know how to use it or what it will do, but have fun and don't forget to write when you need more money."

Stack Trace's picture

We will go out with a whimper instead of a bang.

Ben will be hiding under his mattress stuffed full of FRNs sobbing in fear while the rest of our dumbed-down population lurches from drunken-debauchery to incoherent rage.

It won't be a nice time at all for those of us that work, save, and try to build better lives. Soon the only voice that will listened to will be one that one that goes BANG. The problem is no one will be willing to use it and therefore we will all join in the crying game.

non_anon's picture

Confucius say "spend other peoples money"

upWising's picture

Feel free to copy and slightly edit Ilene's very germane comments and re-post them to the Liberty Street Blog of the Fed.  Or, create your own.  Occupy the Fed, especially at this late hour when the PTTTB (Powers That Think They Be) are sleeping off their Friday Night binge.  



AndrewCostello's picture

The entire economy is a fraud.  If we don't fight back, we lose EVERYTHING.

Join the revolution.  Join now.


connda's picture

""complacency," with which I heartily concur, but to which I would also add hubris and stupidity."

...and feined incompetence.   "Who could have known?"

Hacked Economy's picture

"Who could have known?"

...also known internationally as the "oopsie".

hidingfromhelis's picture

He then added that perhaps the biggest reason for the failure was "complacency," with which I heartily concur, but to which I would also add hubris and stupidity.

...to which I would add corruption.  Maybe I'd just substitute it outright.

The nobody bit was well played, and your post on the NY Fed blog was awesome.

Dirtt's picture

I was impressed how Lee got through the entire contribution without a 'token' ('blanket') "corruption" charge. Maybe because corruption is no longer corruption.  Corruption today is the wind.

The USA is as desensitized to corruption as it is to the wind. People don't care that it blows in their faces anymore.  They just pray the arctic temps. don't kill them.  THEY are already dead.

cranky-old-geezer's picture



Many people have stopped caring what elitists think, because it really doesn't matter what they think.

Their entire system is based on confidence. Confidence is what keeps it afloat and operating.

When elitists experience financial losses from their incompetence, they simply head to the Fed and swap their losses for freshly printed cash. None of the rest of us can do that of course.

The Fed is the enabler of all this elitist incompetence ...and fraud and criminality.

But the whole thing operates on people's confidence in it. Since most people are sheep wanting to believe in it, elitists have little to worry about on the surface.

But people's confidence is the Achilles Heel. The fundamental weakness in their system.

For example, the US dollar has kept world reserve currency status far longer than is justified by fundamentals, relying on nothing but worldwide confidence now. But that worldwide confidence is starting to show signs of breaking down, requiring a certain amount of imperialistic military intervention to maintain WRC status these days, like Iraq and now Libya.

As long as challengers to this worldwide confidence are small and militarily controllable, no problem.

But what happens if a large challenger appears? A challenger large enough and influential enough to bring the entire system (aka ponzi shceme) crashing down, also militarily strong enough they can't be brought back in line militarily?

What if two or three such large challengers banned together acting in unison?

JungleJim's picture

I think more than a few of us have been thinking along the same lines for many years.

Now it would be interesting if this all came to pass what  particular ME country did to "re-align" itself with the new world order ....

Just thinking .....

eddiebe's picture

Hey cranky, to answer your last question: Then the leaders of those challengers get either bought off, or eliminated.

upWising's picture


The American People Must Understand that This, The Greatest Country The World Has Ever Known, is doing JUST GREAT!!  Black Friday was GREAT and when you go to the Mall and consume, you are doing God's Work.!!!

We ALL need pull together and do OUR PART to Defend the Homeland:

• DRINK ALCOHOL!  (If a little is good, a lot is better, and lots and lots is better yet)
• WATCH YOUR TELEVISION! (of course everything you see is true!  That's why it's on TeeVee!!)
• BE SURE TO GO FREQUENTLY TO AN ALL-YOU CAN EAT BUFFET!!  (If a little is good, a lot is better, and lots and lots is better yet)
• ACCEPT ALL CREDIT CARD OFFERS!  (You can never have too much credit!)

but above all, stay close to your LazyBoy or BarcaLounger, keep fresh batteries in your remote control, and have

F A I T H    A N D    C O N F I D E N C E     I N    T H E     S Y S T E M!


whirlybird rules's picture

Wow man, you must be short everything except gold :)


lunaticfringe's picture

I junked ya just on the basis of pure obnoxiousness.

illyia's picture

Jim Puplava (Financial Sense) was right when he wrote "The Perfect Storm" series way back in the early 00's.  It is now archived. He pretty much called it, blow by blow, over ten years ago.


duo's picture

if you measured inflation as it was done when Clinton took office, gdp after applying the deflator would show our economy is smaller now than in 1997...almost a 15-year depression.  we make fewer cars and houses, have millions more out of work, yet the FED thinks gdp has doubled in that time?  The rule of compounding lies.


Element's picture

And he's called for a global depression and developed world urban societal collapse from peak-oil in the 2014 to 2015 window ... he claims to say it as he really sees it developing, and invest, or not, accordingly ... we shall soon see if he is correct.

When the MSM use the term "The Developed World" to refer to the West, ... yeah ... ... they don't mean it.

Kokulakai's picture



 The perpetrator claims to be clueless?

Staff never intended to "find" evidence of overvaluation.


Jim in MN's picture

The Federal Reserve and Treasury Dept. should be forbidden from having offices in NYC.  Just to inconvenience the corrupt bastards.  Make it less glamorous to be a corrupt swine. 

Save some coin, close the NYC offices!

cossack55's picture

Agreed. Detroit has many empty buildings just waiting for some new less-than-human occupants.

resaci's picture

What makes you think we want them in Detroit?  Quarantine them in Guantanamo Bay with the rest of the terrorists!

SheepDog-One's picture

The FED: ' Yea! We suck! We're thieves, acting like we're incompetents. However, we call the shots around here, we control everything, we're above question and if you do think about challenging us, we've got maps of all the grassy knolls everywhere, so fuck off! '

Coldfire's picture

Elite Personality Disorder also leads to delusions of relevancy.

BoNeSxxx's picture

"Millions of amateur economic forecasters who frequented the financial message boards and blogs saw what was happening and what was coming."

3-4  open minded, intelligent, financially savvy Tyler Durdens who continually raise the bar for the financial message boards and blogs saw what was happening and what was coming. 

There, fixed it.

Element's picture

The amateurs may get the timing wrong, in being too pessimistic, too early, but they do tend to get the trends picture pretty close to actual.

Probably the only thing that really surprised me since 2008 was the mind-blowing scale of formal and informal corruption, working hand-in-glove with the mob-family-tribe, and the fantastic degree of the rigging of everything, HFT, POMO, staggering SEC duplicity worthy of summary executions, and the systemic absence or failure of law and the role of truth, fact and personal and corporate accountability in this whole shitty process.

The most pathetic development of all I would have to say is mark-to-make-believe accounting and valuations, closely followed by MERS.

As the ekonomic and financial trends were a piece of cake to grasp, and understand, ... and rationally reject.

Pity no one gives a toss about important stuff any more.

Can I have a bonus now? ... yeh, ... I know ... gots to turn to the Dark-Side to get those ...

JungleJim's picture


                that pretty much sums it up. Notice that all the principle actors (criminals) are still in critical offices in goverment, education, news, etc.

SheepDog-One's picture

'Amateur financial forecasters who frequented the blogs'...yea nice try at a backhand slap punkass cowards, trying to make us look like dopey loonies.... Sour grapes...what you mean is 'Those who have called us out all along and are seriously pissing us off right about now'

Fuck off, FED.