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The PhD economists/Mensa members comprising the esteemed Federal Reserve Board of Governors (FRBG) held their paramount, decisive, crucial, meaningful, significant (via Thesaurus.com) meeting last Wednesday. It's like the Super Bowl for Wall Street and the financial media. They get all excited and view these meetings of our country's best and finest omniscient economists as vital to predicting the true direction of the economy. The FRBG puts Nostradamus to shame with their forecasting abilities. The complex (and hush-hush) econometric models which they employ apparently are built upon permabull algorithms, permabull statistical theories, and permabull linear regression analysis. And as permabulls, it's unfathomable for them to have the possibilty of the economic activity of the country to decline. Because their sophistication will allow them to turn a few knobs, and adjust a few levers to keep the economy moving forward. Therefore their hush-hush econometric models treat all declining economic activity as "adjustments" and they can be "contained" (relax, no prob). And only someone with a PhD from an elite American University could possibly decipher the labyrinthine details of these models. It's why every word from their pronouncements, speeches, and testimonies is parsed and fretted over. Because when you're as brilliant as an FRBG, you can only speak in some incoherent academic language. So because of their vast formal education, and their "access to data which no one else is privy to", then they will certainly be able to decipher when we're facing a severe downtrend. Right? Let's take a look at the two most recent major tops in economic activity.
In Crameresque style, Chairman Alan Greenspan was super bullish about the economic prospects of the nation right smack into the 2000 major top. In January 2000 Mr. Greenspan read a speech with his rose-colored bifocals, when he opined, “ Four or five years into this expansion, in the middle of the 1990s, it was unclear whether, going forward, this cycle would differ significantly from the many others that have characterized post-World War II America. More recently, however, it has become increasingly difficult to deny that something profoundly different from the typical postwar business cycle has emerged. Not only is the expansion reaching record length, but it is doing so with far stronger-than-expected economic growth. Most remarkably, inflation has remained subdued in the face of labor markets tighter than any we have experienced in a generation. Analysts are struggling to create a credible conceptual framework to fit a pattern of interrelationships that has defied conventional wisdom based on our economy's history of the past half century."
So let's just parse his words and make it easy. Right at the major top in the first half of 2000, "The Maestro" (TM) was very bullish about the economy. Because of course, only an omniscient economic seer could understand that right at the major top in 2000, the nation was undergoing something "profoundly different". And TM continued to raise interest rates in the first half of 2000 into May, backing up his bullish outlook about the "profoundly different" economic prospects in the US. In short he was confident.
And you can't avoid finding good old Larry Summers' name when doing research about the most bone-headed economic outlooks in recent memory. Here's what the brilliant Lawrence Summers had to say about the economic prospects of the nation in March 2000: "U.S. Treasury Secretary Lawrence Summers also jumped into the New Economy theme, telling the same group Monday that the technology-driven economy was benefiting the majority of Americans." It's easy to forget that this guy somehow weaseled his way into being the US Treasury Secretary. So right into the major top in 2000, old Larry was very bullish. In short he was confident.
Then who can forget the widely respected Chairman Ben Bernanke's brilliance, when he was very convincing and reassuring (relax, no prob) with his predictions about the housing market right into the major top in 2006. Here are some of Helicopter Ben's (HB) famous reassurances, just relax, the falling housing prices are minor "adjustments" and the problems can be "contained" (no prob):
February 2005: "Housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise." In March 2007 : "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." In October 2007: "Despite the ongoing adjustments in the housing sector, overall economic prospects for households remain good. Household finances appear generally solid, and delinquency rates on most types of consumer loans and residential mortgages remain low."
And into the major top in January 2008, HB was unconcerned : "The Federal Reserve is not currently forecasting a recession." In short, he was confident.
So now back to the current situation. At the meeting last Wednesday, Janet Yellen and the FRBG stated they have become confident about the health of the economy. Uh-oh.