Behold The Brains Behind Ben Bernanke's Binary Black Box

Tyler Durden's picture




 

When it comes to the decisions made by a group of academics behind closed doors to keep the stock market in nominal terms up at all costs (nevermind such trivial matters as the jobless rate, inflation, i.e., all those things they are tasked with), one would think they are all based on the bubblicious ramblings of one Ben Bernanke, or Charles Evans, or even one Janet Yellen. One would be very wrong.

As it turns out the real decisions that determine the value of paper money (laughable as it is), and thus billions of people in the world, are all in the virtual hands of the following three entities: Ferbus, Edo and Sigma.

As the WSJ's Jon Hilsenrath explains "they are computer-modeling programs the central bank uses to make predictions about how various policies and events will play out across the economy....The Fed's main economic model, launched in 1995, is called FRB/US, pronounced "Ferbus." It uses hundreds of different mathematical equations to describe how the economy works. " Brilliant. And as Hilsenrath himself adds further on, "The models are deeply flawed. They failed to foresee the financial crisis in 2008 and have tended to overestimate the strength of the economy for several years." Hilsenrath then goes on to pose a very rhetorical question: "Could they fail the Fed again?" The answer is painfully obvious to anyone who has been on the receiving end of the Fed's endless attempts to blow a credit bubble always and forever. And just in case it is not obvious, let's just remind everyone that "subprime is contained."

From Hilsenrath:

When the Federal Reserve said in December that it would keep short-term interest rates near zero until the unemployment rate falls to 6.5%, it was backed by a team of geeks who get little attention outside the central bank but a lot of attention inside.

 

The geeks have names such as Ferbus, Edo and Sigma. They are computer-modeling programs the central bank uses to make predictions about how various policies and events will play out across the economy.

 

In December, the Fed wanted to telegraph how long it would keep interest rates low. To do that it used forecasting models to map out different scenarios. Looking to the models for guidance, Fed officials decided to announce they would keep interest rates near zero until the unemployment rate drops to 6.5%. The models told them such a commitment would help nudge unemployment lower—it was 7.7% in November—and wouldn't risk a big burst of inflation.

 

Of course, no model or human can perfectly predict the future. But the Fed models have a more specific problem. Despite all their complexity and sophistication, they have long been plagued by gaps in how they read and project the economy. One of the biggest is that they have ignored the nuances of the financial system—one of the primary channels through which Fed policy works.

 

The models have formulas that predict how many pennies an investor will spend for every $1 increase in his stock-market portfolio or how much less banks might lend if interest rates go up half a percentage point. But they haven't predicted the vulnerability of banks to a financial panic or how that vulnerability affects the broader economy.

 

Fed officials are well aware of this flaw. Chairman Ben Bernanke himself documented the importance of financial-system fragility in his days as an academic. Central-bank staffers are now undertaking a wide-ranging effort to update and improve the models to better account for financial crises. But it is a decadelong project that is far from complete.

It is one thing for fringe media to speak up against the central planners and their failed models. It is something else for a member of the status quo to speak up.

What will happen when Fed officials raise interest rates in the future? The models make predictions about unemployment and inflation, but Mr. Sheets worries they might not foresee new financial shoes poised to drop. 

 

"They've really internalized these models and that's very risky," Mr. Sheets said. 

 

The Fed's main economic model, launched in 1995, is called FRB/US, pronounced "Ferbus." It uses hundreds of different mathematical equations to describe how the economy works. Punch in a lower interest rate, and Ferbus spits out predictions of how much growth and inflation should follow. Punch in some other event—like a sudden contraction in government spending or a jump in tax rates—and it spits out predictions of how the economy should respond. Smaller-scale models since have been developed, with more advanced techniques, including Edo and Sigma.

 

The fingerprints of Ferbus and its friends are all over the Fed's latest interest-rate decisions. In two important speeches this year, Fed Vice Chairwoman Janet Yellen described in detail how she and Fed staff used the models to gauge how long interest rates could remain low without generating too much inflation, though she acknowledged in the speeches it would be "imprudent to place too much weight" on the models. Mr. Bernanke, in his December news conference, said the Fed ran a range of scenarios through different models to come up with its interest-rate plan.

 

Fed officials say they aren't slaves to economic models and that while the models help them think about problems, they don't dictate their responses. "Model results are just one input into forecasting and policy analysis," Michael Kiley, a Fed economist and senior modeler, said in a presentation in New York this year.

 

Mark Gertler, a New York University professor and co-author with Mr. Bernanke during his days in academia, plays down Mr. Sheets's critique. The models have made important advances in recent years and now include much more detail on the financial sector, Mr. Gertler says. Four years after the financial crisis, he says, Fed officials are "intimately aware of the issue of financial vulnerability."

 

Yet given the unknowns about unconventional Fed policies, Mr. Sheets's warning warrants attention.

Sadly, when the Fed's latest attempt to prop up the economy, by "virtue" of expanding its balance sheet to astronomic proportions: by some calculations it will reach a DV01 of $5 billion in two years, comes crashing down, the last thing anyone's attention will be focused on will be the models (glitches notwithstanding) that brought the world to this grand reset, when not even the central banks will be able to hit a "restore" button and start everything from scratch. But fear not: that can never happen. Just like home prices can never drop. And just like "subprime was contained" ....once upon a time.

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Mon, 12/31/2012 - 16:44 | 3110356 Mercury
Mercury's picture

Oh great, the world is run by a few of losers playing thw Windows XP version of SimFed.

Mon, 12/31/2012 - 16:45 | 3110368 wee-weed up
wee-weed up's picture

The Bernank don't need no steenkin' computer!

Mon, 12/31/2012 - 16:54 | 3110414 Thomas
Thomas's picture

Bernanke is too busy having an affair with his autobiographer.

Mon, 12/31/2012 - 18:25 | 3110783 francis_sawyer
francis_sawyer's picture

Dual mandates bitchez!... [Keep pumping the stock market & fleece the sheep]...

Mon, 12/31/2012 - 20:02 | 3111044 economics9698
economics9698's picture

It’s really a simple game Bernanke, set the fucking Fed Funds rate at 2% to 3% higher than the inflation rate, stop printing money for your Zionist bastard sub human friends, and get the fuck out of the way.

It amazes me the lengths the elites will go to hide their theft.

We see it, the curtain is gone.

Next stop, hanging from the gallows pole, taking all your families assets, making your children orphans.

Tue, 01/01/2013 - 11:36 | 3111976 Bogdog
Bogdog's picture

I'm in awe of your ability to make two cultural references in one short sentance.

Mon, 12/31/2012 - 16:53 | 3110409 Thomas
Thomas's picture

SimFed: that was very funny.

Mon, 12/31/2012 - 17:27 | 3110577 ball-and-chain
ball-and-chain's picture

It comes down to theft.

I call it the Ivy League Mafia.

Bernanke's man-tits squirt milk in the form of QE to his elite country club banking friends.

The rest of us eat cake.

http://www.angrysinner.blogspot.kr/2012/12/yesterday-i-hiked-ten-miles.html

Mon, 12/31/2012 - 18:33 | 3110800 Diogenes
Diogenes's picture

"As the WSJ's Jon Hilsenrath explains "they are computer-modeling programs the central bank uses to make predictions about how various policies and events will play out across the economy....The Fed's main economic model, launched in 1995, is called FRB/US, pronounced "Ferbus." It uses hundreds of different mathematical equations to describe how the economy works. " Brilliant. And as Hilsenrath himself adds further on, "The models are deeply flawed. They failed to foresee the financial crisis in 2008 and have tended to overestimate the strength of the economy for several years.""

 

""The models are deeply flawed. They failed to foresee the financial crisis in 2008 and have tended to overestimate the strength of the economy for several years.""

That's not a bug. It's a feature.

The world's governments all operate on computer models and economic indicators, and all of them are fudged to make the government look better, and conceal problems.

Mon, 12/31/2012 - 22:34 | 3111342 GAAPpreNixon
GAAPpreNixon's picture

Yep. Three programs that run a WORLD CLASS CIRCLE JERK because main street has been excluded from the equation...

Silver looks mighty nice right now. Buy at your own risk but do you really think there is any ACTUAL (AS IN AFTER INFLATION) INCREASE IN 2012 in value in a stock market valued in $?

IF you aren't getting more than 18-20% "profit", you aren't even treading water.

Mon, 12/31/2012 - 23:52 | 3111477 Ident 7777 economy
Ident 7777 economy's picture

Wow.

 

Google search on FRB/US

 

https://www.google.com/search?q=FRB%2FUS+model&aq=f&oq=FRB%2FUS+model&aq...

 

Includes:

A Guide to FRB/US

 

A Macroeconomic Model of the United States

Macroeconomic and Quantitative Studies

Division of Research and Statistics

Federal Reserve Board

Washington, D.C. 20551

version 1.0, October 1996

 

 

http://www.federalreserve.gov/pubs/feds/1996/199642/199642pap.pdf

 

and

 

Finance and Economics Discussion Series  

A Guide to FRB/US: A Macroeconomic Model of the United States
F. Brayton and P. Tinsley (eds.) 
1996-42

 

http://www.federalreserve.gov/pubs/feds/1996/199642/199642abs.html

 

 

 

FRB/US equations - Peter Tulip's web page http://www.petertulip.com/FRBUS_equation_documentation.pdf

 

 

- - - - - - - 

None of the equations incude human qualities like confidence, human intuition, fear ,,,

 

 

 

 

Tue, 01/01/2013 - 09:22 | 3111799 Go Tribe
Go Tribe's picture

No human inputs, eh? Let's face it: the 20th and 21st centuries will be remembered as the era when humans became subservient to machines. All "advances" during this time have simply tied us tighter in bondage.

Tue, 01/01/2013 - 10:13 | 3111834 Gazooks
Gazooks's picture

1011010010 01001010 1001 010!

Tue, 01/01/2013 - 20:24 | 3113232 ForTheWorld
ForTheWorld's picture

A quote from the equations PDF on Peter Tulips page:

DCON*ZYH: DCON is a dummy variable equal to 0 prior to 1986, and 1 after 1988, with a linear segment
connecting these points between these two dates.

Dummy variables? Hard-coded values? If this is what the actual code contains, that's ridiculous.

Edit: The more I read the info on these equations, the more stupified I get.

Mon, 12/31/2012 - 16:44 | 3110358 Snakeeyes
Snakeeyes's picture

You mean the brains that believe in unlimited money printing and Fed purchases of debt WITHOUT any backing of gold or other precious metals??

http://confoundedinterest.wordpress.com/2012/12/30/if-the-chinese-raided...

Mon, 12/31/2012 - 16:44 | 3110359 Beam Me Up Scotty
Beam Me Up Scotty's picture

Is this an upgrade to the Magic 8 Ball?

Tue, 01/01/2013 - 09:36 | 3111809 Disenchanted
Disenchanted's picture

 

 

Outlook good

 

@link above, response to this question:

 

Is Bernanke's binary black box an upgrade to the Magic 8 Ball?

 

Without a doubt.

Mon, 12/31/2012 - 16:44 | 3110361 khakuda
khakuda's picture

Sometime in the next few years, we will open the paper to read:

"No one could have predicted this.  Our models never saw this coming"

Mon, 12/31/2012 - 16:46 | 3110370 magpie
magpie's picture

Everybody in the know assumes it has been Dark Dolphin vs. Luciferian Mistress for the last year

Mon, 12/31/2012 - 18:35 | 3110805 Diogenes
Diogenes's picture

What do you think we are in now?

Mon, 12/31/2012 - 16:46 | 3110372 fonzannoon
fonzannoon's picture

Yes but these robots were students of the great depression.

Mon, 12/31/2012 - 16:50 | 3110393 ekm
ekm's picture

LOL

Positive sarcasm

Mon, 12/31/2012 - 16:45 | 3110373 Black Forest
Black Forest's picture

It uses hundreds of different mathematical equations to describe how the economy works.

Excel sheets, I suppose.

Mon, 12/31/2012 - 16:47 | 3110381 WarPony
WarPony's picture

skynet and the fedinators!  run!

Mon, 12/31/2012 - 16:55 | 3110417 Thomas
Thomas's picture

FedNet

Mon, 12/31/2012 - 16:50 | 3110394 XtraBullish
XtraBullish's picture

BUY BUY BUY and BBQ the shorts (again)!!!!! Never underestimate the replacement power of stocks within an inflationary spiral!!!

FED = Ponzi

Mon, 12/31/2012 - 16:51 | 3110395 are we there yet
are we there yet's picture

Even if flawed, It might help investors if anyone knows of a link to a site that calculates the current 'Ferbus' model to help know when Bernankie is going to fling a monkey gift at the economy.

Mon, 12/31/2012 - 17:13 | 3110505 GMadScientist
GMadScientist's picture

FRB meeting schedules are well-publicized already.

Mon, 12/31/2012 - 19:28 | 3110957 are we there yet
are we there yet's picture

Are the public FRB meeting stats honest or manipulated? IF so is the source information going into FRB calculations honestly available?

Mon, 12/31/2012 - 16:50 | 3110396 Edmon Plume
Edmon Plume's picture

In a nutshell, they took the global warming models and plugged them into the financial system.

Mon, 12/31/2012 - 17:35 | 3110615 verum quod lies
verum quod lies's picture

The simple question is out of sample how accurate have they been (i.e., particularly since the "financial crisis" began)? My guess is that they suck. Typically, simple more dynamic models are best.

I can remember back when I was interested in such things and these types of models were all the rage (versions of the MIT/Penn model, 100+ equation type models), and I went to a presentation by a woman about one "complex" macro-model she worked on at Bank of America. She went on and on about how complex they were and how she was responsible for one or more equations, blah, blah, blah ... Then during Q&A my buddy asked her how accurate they were? She explained that her piece was so and so accurate and another piece was so accurate ... Long story short, once you aggregated the various pieces to get a macro variable forecast like consumption, investment, or finally something like GDP the "model" was roughly plus or minus about 100% accurate. In short, a coin flip was better. My buddy then asked her why bother, and the poor thing tried to answer but by then it was evident the king had no clothes. Anyway, whenever a "professional economist" trots out a complex model of the macroeconomy I normally roll eyes and try to think of what I will be having for lunch. Simpler is better, largely because errors tend to accumulate (and often in a nonlinear fashion).

 

Mon, 12/31/2012 - 20:59 | 3111170 geekgrrl
geekgrrl's picture

That's a funny story. It's always nice to hear about theoreticians squirming when their pet premises are questioned. Fortunately these people are not designing bridges. Or maybe it's unfortunate, as their utter failure would be more immediately apparent.

Whenever I think of economic modeling I'm reminded of Lewis Carroll's croquet game in Alice in Wonderland. Here, the players (Fed, big banks, old money) think they can get the ball through the wickets because they can control the mallets. The problem is that the mallets have minds of their own, and this is why the central planners can't get the balls through the wickets. Confusing matters further, they are lying about exactly which wickets they are aiming for.

Tue, 01/01/2013 - 09:25 | 3111802 Go Tribe
Go Tribe's picture

Mr. Market walks like a drunk man and there is no telling where he is going. So with the economy.

Mon, 12/31/2012 - 16:53 | 3110398 buzzsaw99
buzzsaw99's picture

fed thinking is shockingly simplistic. the stock market went down before the great depression. therefore, don't let the stock market go down and the problem is solved. that and a guarantee on bank deposits. it really is that stupid. the worst part is that back then it probably would have worked. this time it won't because the fed IS one of the problems along with the twin deficits.

 

generals always fight the last war

Mon, 12/31/2012 - 17:11 | 3110498 kaiserhoff
kaiserhoff's picture

This time, there are no real jobs, because gubbermint is half the "economy" and growing like cancer.

They are modelling nothing except their own circle jerk.

Mon, 12/31/2012 - 17:22 | 3110547 buzzsaw99
buzzsaw99's picture

the maginot line of zirp will never be breached. :roll:

 

tanks for the memories [/george s. patton]

Mon, 12/31/2012 - 16:53 | 3110404 you enjoy myself
you enjoy myself's picture

let me guess - the confidence in their models is because they hacked it to match historical data for a finite amount of hand-picked variables?  cause that always works when you're dealing with non-linear, chaotic systems with nearly infinite variables.  just ask a climatologist.

Mon, 12/31/2012 - 17:18 | 3110539 Imminent Crucible
Imminent Crucible's picture

Climatology? These guys can't even predict the weather, let alone climate change. Billions of dollars worth of satellites, computer hardware and weather modeling software and they still can't get tomorrow's forecast right.

"Tomorrow, mostly sunny economic conditions with a chance of scattered afternoon inflation. Looks like that subprime storm system will miss us and hit Ireland instead. The longer-term forecast is for Las Vegas home prices to rise another 40% in the coming year."

Tue, 01/01/2013 - 08:54 | 3111788 Svendblaaskaeg
Svendblaaskaeg's picture

James Hansens scenario A, B and C, big fail

IPCC Leaked AR5 figure 1.4, climatemodels fail bigtime:

http://wattsupwiththat.com/2012/12/18/dr-david-whitehouse-on-the-ar5-fig...

Tue, 01/01/2013 - 09:46 | 3111813 Disenchanted
Disenchanted's picture

 

 

 

Climate Money

by Joanne Nova @ Science and Public Policy Institute . org

Mon, 12/31/2012 - 16:55 | 3110415 Cursive
Cursive's picture

These models, Ferbus, Edo and Sigma are not intended to help the economy.  They are intended to validate failed policies as the FRB attempts to extract wealth from its host, without killing the host.

Mon, 12/31/2012 - 18:37 | 3110812 Diogenes
Diogenes's picture

Correct except for the not killing the host part.

Mon, 12/31/2012 - 16:57 | 3110422 ebworthen
ebworthen's picture

They may as well work on models to explain Women's emotions, Men's passions, and what a pack of Hyena's will do if there is an alien invasion by intelligent Wildebeest.

Mon, 12/31/2012 - 17:17 | 3110536 Jacque Itch
Jacque Itch's picture

You could have just stopped at "women's emotions".

Last paragraph has $2 Billion.  Looks like a typo to me.

 

Mon, 12/31/2012 - 16:58 | 3110423 knowless
knowless's picture

so these motherfuckers are just playing a videogame?

 

even in rts or stragedy games there are unforseeable events which change the course of the round... whoops, tsunami..

 

your "sophisticated models" are quite probably less apt than a 13 year old playing civilization.

let's enders game this bitch, we would have better chances...

 

honestly, I hope it's already in progress..

Mon, 12/31/2012 - 18:10 | 3110748 Umh
Umh's picture

Yeah; that's it. When they get it wrong a tulip pops up and then it dies.

Mon, 12/31/2012 - 18:39 | 3110815 Diogenes
Diogenes's picture

Ha ha ha that is the funniest thing on ZH in weeks. Thanks for a laugh.

Mon, 12/31/2012 - 17:00 | 3110424 muppet_master
muppet_master's picture

SHORTED spx @

1419, 1424 and 1426...avg SHORT PRICE = 1424

thanks odummernomics QEorganizre-rapist of the 99% to "save" the fat cats...

never mind the debt ceiling..oh yeah the kenyan-kenysian solution is to raise it again...

uh, ooh, uh, ooh, uh...QEorganizer have every low iq demon-rat's credit card increased form 2k to $20k....that will "SOLVE" the economy...LOL !!!!

Mon, 12/31/2012 - 17:02 | 3110436 Beam Me Up Scotty
Beam Me Up Scotty's picture

I'm cheering for ya, bro.  Hope you don't get your face ripped off....

Mon, 12/31/2012 - 17:00 | 3110431 ebworthen
ebworthen's picture

p.s. - Vacuum tube circuits actuated by monkeys hitting random colored buttons for bananas would do a better job.

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