Central banks are supposed to ensure price stability and support economic growth. To do so effectively, however, they must be able to consistently forecast economic movements. Since monetary policy operates with a lag of anywhere from 12-24 months, if the central bank only acts once a recession, or an inflationary boom, has clearly set in, it will be too late for it to do anything other than, perhaps, cushion the prevailing trend.
But how good are central bankers at economic forecasting? Well, as Peter Hodson nicely alerts us in today’s National Post (Financial Post section), they are not very good. He produces a number of quotes from Ben Bernanke’s past statements:
“Fannie Mae and Freddie Mac are adequately capitalized and in no danger of failing” — July 2008
“Among the largest banks, the capital ratios remain good, and I don’t expect any serious problems … among the large, internationally active banks that make up a very substantial part of our banking system.” – February 2008
At TheStreet.com , Doug Kass has assembled a varied assortment of Bernanke’s failed predictions:
“Employment should continue to expand…. The global economy continues to be strong … financial markets have remained supportive of economic growth.” – July 2007
“We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.” – February 2007
“Overall economic prospects for households remain good. The labor market is expected to stay healthy. And real incomes should continue to rise. The business sector remains in excellent financial condition.” – February 2007
In view of all this — and I invite you to consult Mr. Kass’ article to read more of Bernanke’s blunders –Â one of the great mysteries of political economy is how central banks have maintained their legitimacy for so long.
Tags: Bank of Canada, banking, Ben Bernanke, Central Bank, economics, Employment, fannie mae, Freddie Mac, George Bragues, Government intervention, Inflation, interest rate, Interventionism, Monetary Policy, USA