Casey Files:
When Bernanke Says All
Is Well,
it's Time to Duck and Cover
By the editors of Casey
Research
Mar 25, 2009
"We've averted" the
risk of a depression, Federal Reserve Chairman Ben Bernanke said
this week. "Now the problem is to get the thing working
properly again."
Appearing on CBS network's
60 Minutes, Bernanke told correspondent Scott Pelley that concerted
efforts by the government likely averted a depression similar
to the 1930s. He also stated the nation's largest banks are solvent
and that he doesn't expect any of them to fail; and that the
U.S. recession will come to an end "probably this year."
Is this finally the light at
the end of the tunnel for the U.S. economy?
We don't want to appear as
perpetual gloom-and-doomers, but fact is, when Bernanke tries
to predict the future, he's usually wrong.
Prediction: The subprime mess is grave but largely
contained, Bernanke reassured the Federal Reserve Bank of Chicago
in a speech on March 15, 2007.
While rising delinquencies
and foreclosures will continue to weigh heavily on the housing
market, it will not cripple the U.S. economy, he said. "Given
the fundamental factors in place that should support the demand
for housing, we believe the effect of the troubles in the subprime
sector on the broader housing market will likely be limited."
Reality: The median price of a home sold in
the U.S. fell to $170,300 in January 2009, down 26% from a year
and a half earlier, according to the National Association of
Realtors. This housing crash has spread pain more widely than
any before it. Home prices fell about 30% during the Great Depression,
according to calculations by Yale University economist Robert
Shiller. But back then, the nation was less concentrated in urban
centers, and much fewer Americans owned homes.
Other housing downturns in
recent decades have been regional; this one is national. Prices
in the fourth quarter of 2008 fell in nearly 90% of the top 150
metro areas, according to the Realtors group. And 5.4 million
homeowners, about 12%, were in foreclosure or behind on mortgage
payments at the end of last year. The Federal Reserve now estimates
home prices could fall 18%-29% more by the end of 2010.
Prediction: "I expect there will be some
failures" of smaller banks, said Bernanke in February 2008.
"Among the largest banks, the capital ratios remain good
and I don't anticipate any serious problems of that sort among
the large, internationally active banks that make up a very substantial
part of our banking system
Reality: IndyMac Bank failed in July 2008, with
$32 billion in assets. Washington Mutual failed in September
2008, the largest bank failure in history with $307 billion in
assets. Wachovia was sold to Wells Fargo in October 2008, amid
concerns about its financial health, and Citigroup still scrambles
to raise cash from both the government and private sources.
Fortunately for Bernanke, and
unlike us at Casey
Research, he doesn't make a living by being right about the
future. If he did, we strongly suspect that by this time, he
would find himself without subscribers.
Thus, it is a mystery to us
why the mainstream media still seem to eagerly soak up his every
word, much like a devout Catholic would absorb a papal ex
cathedra proclamation. But until the last American has woken
up to Bernanke's fallibility, that likely won't change.
In the meantime, we recommend
using the Fed chair's economic outlooks as a contrarian indicator
- if he says the market looks good, run for cover as fast as
you can.
***
Bernanke may be wrong more
often than not and still keep his job - we at Casey Research
cannot afford that luxury. Our subscribers depend on us researching,
correctly analyzing, and predicting market currents and emerging
trends... which also includes the movements and changing policy
decisions of Big Politics.
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###
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