I honestly don’t understand this at all (from Krugman):
In January 2005, National City’s chief economist had delivered a prescient warning to the Fed’s board of governors: An increasingly overvalued housing market posed a threat to the broader economy, not to mention his own bank and others deeply involved in writing mortgages.
The message wasn’t well received. One board member expressed particular skepticism — Ben Bernanke.
“Where do you think it will be the worst?” Bernanke asked, according to people who attended the meeting, one in a series of sessions the Fed holds with economists.
“I would have to say California,” said the economist, Richard Dekaser.
“They have been saying that about California since I bought my first house in 1979,” Bernanke replied.
This time the warnings were correct …
Krugman points out the obvious: that California did in fact go through a major housing bust in the mid-late 90s. This reminds me a bit of Greenspan’s belief that the average national housing price would never decline in the United States, despite the fact that the housing index in Japan had gone down 60%.
I understand that economics is complicated and that things like housing prices are very difficult to predict. But why ignore actual data that is staring you in the face? I just don’t understand this at all.
I emailed my friend at a hedge fund (who sometimes takes a more sympathetic view of such things) and asked him how bad he thought Bernanke had screwed up on this. He answered:
horribly. i remember living in california during that time and seeing the huge asset bubble collapse. what an idiot.
