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(I know that what I'm writing here is ludicrous but...) I wonder if a fed chairman who does foresee financial bubbles collapsing would actually be able to say

(I know that what I'm writing here is ludicrous but...) I wonder if a fed chairman who does foresee financial bubbles collapsing would actually be able to say so publicly. The fed is supposed to be immune from lobbying and political forces in theory, but I wonder what the chances are for someone to bow to the social pressures and pretend like everything is just toally fine. In fact, how long has it been since we've had a high ranking federal reserve official actually forecast economic doom? I'm not saying that such officers will never say something negative when the public signals are all green lights, but I can't help but think that there is some skew towards optimism in public comments.

wintersFright 13y ago
"When it becomes serious, you have to lie" - Jean-Claude Juncker, Luxembourg PM and Head Euro-Zone Finance Minister http://blogs.telegraph.co.uk/news/davidhughes/100087136/he-may-be-a-prime-minister-but-he-admits-he-lies-his-way-out-of-trouble/ http://blogs.telegraph.co.uk/news/davidhughes/100087136/he-m...
- hkmurakami 13y ago
  Thanks for the link! This line was hilarious: Hilariously, Schuller went on to say that being caught out lying in this way would not undermine the market’s confidence in future eurozone pronouncements – because it already had no confidence.
- btilly 13y ago
  Anyone who has been anywhere close to finance knows that this is true. The economy is largely about psychology and perception. If someone in a position of authority stands up and says that the sky is falling, they can cause the sky to fall even if it wasn't about to. It is the same problem as the classic run on the banks. Even a fundamentally healthy bank is going to be in trouble if everyone asks for their money back at once.
  - wintersFright 13y ago
    yep - it also just means that right up until a bank holiday and your account is frozen, the official line will always be everything is fine, the bank is well capitalised and there is nothing to worry about...unless you are well connected in which case you will get a whisper to move your money out). So if you aren't one of the well connected people, it pays to be a little paranoid and be first in line to withdraw your money while you can. It's kind of funny, the rational action for any individual is not to keep most of their money in a bank where it is at risk of going away with zero notice. The confidence of the banking system relies on everyone being irrational!
- marcamillion 13y ago
  Well...I mean....can you blame him? In an economy where perception is reality - if the central bankers and main regulators start screaming that the house is going to burn down...guess what happens....exactly. So if they think the house may burn down....they have no choice but to lie to stave it off as long as possible.
k2enemy 13y ago
I think you're exactly right, but it is more than political/lobbyist/social pressure. Even if the fed knew there was a bubble, announcing so would coordinate everyone's actions and we would have a crash for sure. If they announce that there is no bubble, then they have some time to try to manage the situation (which clearly didn't work in the housing crash). More generally, public statements are an important policy instrument for the fed. A lot of macroeconomic research in the last 30 odd years has focused on the importance of people's expectations about the future and how traditional monetary and fiscal policies work once you take into account how they affect people's expectations. For example, the government giving everyone $1,000 may not increase spending today if people expect that this government expenditure will lead to higher taxes tomorrow. So the fed has to take care and think about how what they say and do will affect people's expectations. As another example, right now we're in a situation where it is hard to the fed to lower interest rates because they are already basically at zero. One thing that they could do is say and do things to make people believe that we will have higher inflation in the future. This should spur companies to make investments today rather than hold onto their cash. This isn't to say that the fed can say anything and people will believe it. What the fed says has to be credible. There is a lot of interesting research that looks into this issue and shows what it means for the kinds of policies the fed can or should adopt. The 2004 nobel was awarded in this area -- the nobel page has a lot of good information: http://www.nobelprize.org/nobel_prizes/economics/laureates/2004/press.html http://www.nobelprize.org/nobel_prizes/economics/laureates/2...
- waps 13y ago
  The problem is that this is capitalism, or perhaps better expressed : an auction. There is a bubble if and only if most people believe there is a bubble. There is no bubble if most people don't believe there is one. Right now I'd say there definitely isn't one and house prices will rise for a while, even if prices are really at bubble levels. However, the economy is not doing well, so people will notice they can't actually buy "non-"bubble priced houses, and Bernanke can only hold back public opinion for so long.

wintersFright 13y ago

"When it becomes serious, you have to lie" - Jean-Claude Juncker, Luxembourg PM and Head Euro-Zone Finance Minister http://blogs.telegraph.co.uk/news/davidhughes/100087136/he-may-be-a-prime-minister-but-he-admits-he-lies-his-way-out-of-trouble/ http://blogs.telegraph.co.uk/news/davidhughes/100087136/he-m...

hkmurakami 13y ago
Thanks for the link! This line was hilarious: Hilariously, Schuller went on to say that being caught out lying in this way would not undermine the market’s confidence in future eurozone pronouncements – because it already had no confidence.
btilly 13y ago
Anyone who has been anywhere close to finance knows that this is true. The economy is largely about psychology and perception. If someone in a position of authority stands up and says that the sky is falling, they can cause the sky to fall even if it wasn't about to. It is the same problem as the classic run on the banks. Even a fundamentally healthy bank is going to be in trouble if everyone asks for their money back at once.
- wintersFright 13y ago
  yep - it also just means that right up until a bank holiday and your account is frozen, the official line will always be everything is fine, the bank is well capitalised and there is nothing to worry about...unless you are well connected in which case you will get a whisper to move your money out). So if you aren't one of the well connected people, it pays to be a little paranoid and be first in line to withdraw your money while you can. It's kind of funny, the rational action for any individual is not to keep most of their money in a bank where it is at risk of going away with zero notice. The confidence of the banking system relies on everyone being irrational!
marcamillion 13y ago
Well...I mean....can you blame him? In an economy where perception is reality - if the central bankers and main regulators start screaming that the house is going to burn down...guess what happens....exactly. So if they think the house may burn down....they have no choice but to lie to stave it off as long as possible.

k2enemy 13y ago

I think you're exactly right, but it is more than political/lobbyist/social pressure. Even if the fed knew there was a bubble, announcing so would coordinate everyone's actions and we would have a crash for sure. If they announce that there is no bubble, then they have some time to try to manage the situation (which clearly didn't work in the housing crash). More generally, public statements are an important policy instrument for the fed. A lot of macroeconomic research in the last 30 odd years has focused on the importance of people's expectations about the future and how traditional monetary and fiscal policies work once you take into account how they affect people's expectations. For example, the government giving everyone $1,000 may not increase spending today if people expect that this government expenditure will lead to higher taxes tomorrow. So the fed has to take care and think about how what they say and do will affect people's expectations. As another example, right now we're in a situation where it is hard to the fed to lower interest rates because they are already basically at zero. One thing that they could do is say and do things to make people believe that we will have higher inflation in the future. This should spur companies to make investments today rather than hold onto their cash. This isn't to say that the fed can say anything and people will believe it. What the fed says has to be credible. There is a lot of interesting research that looks into this issue and shows what it means for the kinds of policies the fed can or should adopt. The 2004 nobel was awarded in this area -- the nobel page has a lot of good information: http://www.nobelprize.org/nobel_prizes/economics/laureates/2004/press.html http://www.nobelprize.org/nobel_prizes/economics/laureates/2...

waps 13y ago
The problem is that this is capitalism, or perhaps better expressed : an auction. There is a bubble if and only if most people believe there is a bubble. There is no bubble if most people don't believe there is one. Right now I'd say there definitely isn't one and house prices will rise for a while, even if prices are really at bubble levels. However, the economy is not doing well, so people will notice they can't actually buy "non-"bubble priced houses, and Bernanke can only hold back public opinion for so long.