The Corner

The Fed Missed the Signs, But So Did Everyone Else

The Los Angeles Times has conjured up transcripts of Federal Reserve board meetings just before the housing bubble exploded to do a little populist bashing of the monetary authority and its decisionmakers (including current chairman Ben Bernanke). The transcripts aren’t particularly revealing — they essentially say the Fed missed the signs that (in hindsight) were indicators of the worsening housing market. But guess what — almost everyone did. It wasn’t a Fed problem, it was a failure of expert opinion across the board.

That’s probably one of the most important lessons from the housing bust and the Great Recession. My review of the annual reports of the Council of Economic Advisors throughout the 2000s found the same rosy scenarios and unbridled optimism from both liberal and conservative economists. At the end of the day, the failure of macroeconomists to forecast these types of shifts in the economy is an indictment of the hubris of the rule of experts (something I’ve written about in National Review as well as in a critique of estimates of “jobs created” by the stimulus program).

It’s not just about tools and econometric competence; it’s about the complexity of the market, the unsustainability of policies the encourage a mismatch between supply and demand (expansion of home ownership through subprime loans), the subtlety with which markets will respond to incentives (expanded use of “exotic” home financing instruments), and the inevitability of wrenching adjustments to bring it back in line (the Great Recession).

— Samuel R. Staley is associate director of the DeVoe L. Moore Center at Florida State University and a senior research fellow at the Reason Foundation.

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