Commodity Trade Mantra

The Fed’s Inability To Forecast Anything Is The Problem

The Fed’s Inability To Forecast Anything Is The Problem

The Fed’s Inability To Forecast Anything Is The Problem

Seriously, how stupid are we to trust the Federal Reserve?

Forget about Alan Greenspan and his tenure at the helm of the Federal Reserve from 1986 to 2006. There’s too much to say about how, in his Ayn Rand pointy hat (think of the Wicked Witch in “The Wizard of Oz”), he unleashed derivatives of mass destruction on the world, and kept interest rates too low for too long (some free-marketer he was) on account of the fact that his banker buddies liked low-cost financing to leverage themselves to the hilt.

Greenspan is old news. Sure he got a lot of stuff wrong, and later admitted it.

But as they say in Brooklyn, “fuggedaboutit.”

A series of errant Fed forecasts-

Let’s talk about Ben Bernanke and what a great job he’s done, and is doing… NOT.

First of all, he’s really the best of a long line of expert forecasters to come out of the Fed.

His powers of prognostication began when he was a member of the Board of Governors of the Federal Reserve from 2002 to 2005, before he ascended to the top of the heap.

He said in July 2005, “We’ve never had a decline in house prices on a nationwide basis. So, what I think is more likely is that house prices will slow, maybe stabilize, which might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though.”

Then on October 20, 2005, he said, “House prices have risen by nearly 25% over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong economic fundamentals.”

And he followed up on November 15, 2005, saying, “With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly.”

Thank goodness Ben Shalom (his middle name) became the 14th Fed Chairman on February 1, 2006, because on February 15, a few days later, he captured his audience with the brilliant forecast that,“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.”

Well, they didn’t.

As the problem was starting to spin out of control, the Chairman said, on March 28, 2008, “At this juncture… 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.”

And about Fannie and Freddie, Ben with his binoculars said, on July 20, 2008, “The GSEs are adequately capitalized. They are in no danger of failing.”

That was only a couple of months before Fannie and Freddie had to be taken over by the government.

So what if the Fed Chairman isn’t the best forecaster out there? At least he’s a man of his word… right?

Like when he said, “It is not the responsibility of the Federal Reserve – nor would it be appropriate – to protect lenders and investors from the consequences of their financial decisions.” That was back on October 31, 2007.

And, The Federal Reserve will not monetize the debt,” which he said June 3, 2009.

And my personal favorite, coming on December 5, 2010, “One myth that’s out there is that what we’re doing is printing money. We’re not printing money.”

So, what’s the big deal that back in June, Benny the Brilliant said the Fed saw better conditions ahead and they would begin to cut back on their bond purchases (money printing) later in the year and be done buying by mid-2014?

It was just another errant forecast. The economy isn’t doing better, and there was no tapering.

Now the markets are waiting anxiously for the Fed’s next forecast, for their next pronouncement.

That’s why we’re here in the first place. We’re all prisoners in this game. You, me, the markets, we are all beholden to the Federal Reserve to make its forecasts and make its pronouncements and to own our future and shape it for their constituents, the big banks.

When will this all end? My guess is it will be in February. Because it will be a cold day in Hell before the manipulation that mangles us is replaced by free markets… oh yeah, free markets, I forgot about them.

 

Courtesy: Shah

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