The past two days I've been blogging about thoughts that occured to me as I read Ben Bernanke's address to the Economic Symposium last week sponsored by the Federal Reserve Bank of Kansas City. The third thing Bernanke revealed in his speech that I found striking was the number of forecasting errors made by the Fed.
When discussing his current economic outlook, Bernanke admits that the pace of economic growth since last year "appears somewhat less vigorous than we expected." He also notes that "household saving has been higher then we thought." Regarding our balance of payments he reveals, "Like others, we were surprised by the sharp deterioration in the U.S. trade balance in the second quarter." Bernanke summarizes the economic performance of the past year by reporting, "Overall, the incoming data suggest that the recovery of output and employment in the United States has slowed in recent months, to a pace somewhat weaker than most FOMC participants projected earlier this year."
All of these cases in which reality did not match expectations brought to mind Bernanke's past forecasting errors including his 2005 claim that the housing market was not in a bubble and that market fundamentals were sound. You can see a collection of market forecasts Bernanke made on financial television going back to July 2005 here:
Bernanke got it wrong on the housing bubble, sub-prime mortgage market, and the economy in general repeatedly from July 2005 through 2007.
Now the point here is not to take cheap shots at Bernanke. It would be easy to find many others who made similar wrong forecasts in the middle of the decade. We should remember, however, that Bernanke was making these pronouncements as a professional PhD economist, author of an economic principles textbook, Chairman of President Bush's Council of Economic Advisers, and Federal Reserve Chairman. In other words, when commenting on the economy he gets paid a lot of money for knowing what he is talking about.
Bernanke's track record highlights the difference between private entrepreneurial management and government bureaucratic management. If a private entrepreneur made mistake after mistake after mistake, he would soon pile up so many losses that he would be in danger of being forced out of the ranks of the entrepreneur and have to go to work for someone else. On the other hand, if the government bureaucrat makes several important forecasting errors, he can still have a very good career in Washington.
This also demonstrates the danger of giving so much power over the economy to a single chairman on a single board. In a decentralized free banking market, there would still be bank presidents who make forecasting errors and perhaps even place their bank in financial jeopardy. However, the effects would be relatively localized. Because the Federal Reserve has so much centralized power over the monetary system and because money is used in all markets, when the Fed makes a mistake, its consequences ripple though the entire economy.
We have never had a central cola fountain designed to ensure an elastic supply of cola is available for cola drinkers and, lo and behold, we've never had a cola crisis in the over 120 year history of the industry. Yet the more centralized our banking system became since our nation's founding, the faster our currency has lost its value and the more extreme and widespread our financial crises have become. There is a lesson there somewhere.