Recently Fed chairman Ben Bernanke gave a speech to Graduates at the Boston College School of Law in which he said:
Instead, I’d like to offer a few thoughts today about the inherent unpredictability of our individual lives and how one might go about dealing with that reality. As an economist and policymaker, I have plenty of experience in trying to foretell the future, because policy decisions inevitably involve projections of how alternative policy choices will influence the future course of the economy. The Federal Reserve, therefore, devotes substantial resources to economic forecasting. Likewise, individual investors and businesses have strong financial incentives to try to anticipate how the economy will evolve. With so much at stake, you will not be surprised to know that, over the years, many very smart people have applied the most sophisticated statistical and modeling tools available to try to better divine the economic future. But the results, unfortunately, have more often than not been underwhelming. Like weather forecasters, economic forecasters must deal with a system that is extraordinarily complex, that is subject to random shocks, and about which our data and understanding will always be imperfect. In some ways, predicting the economy is even more difficult than forecasting the weather, because an economy is not made up of molecules whose behavior is subject to the laws of physics, but rather of human beings who are themselves thinking about the future and whose behavior may be influenced by the forecasts that they or others make. To be sure, historical relationships and regularities can help economists, as well as weather forecasters, gain some insight into the future, but these must be used with considerable caution and healthy skepticism.
Bold type emphasis mine..
Now this goes to a post herejust last week on the subject of the Fed’s forecasts.
The only question we could have then is, “if Bernanke admits the forecasts made by himself and other economists are equatable to a weather forecast, why are the making them so far out into the future and why aren’t we bring told they are essentially guesses”? I mean, even the weather man is not insane enough to be making prediction for next May, yet Bernanke and company are making them not only for next May, but the one after that.
Haven’t we learned yet that any economic prediction, push out to a year is not at all reliable, much as a weather forecast for that date would be? Even the weatherman is careful enough to preface what he says with “stay tuned tomorrow because things can change”.
Yet, when we read ANY of the Fed forecasts, they are delivered with such a certainty that one is lead to believe their belief in the accuracy of their predictions despite what we know to be the error rate (it is large). Now, there are those who will say they are required to make the forecasts they produce.
Then ought not the type of candor Bernanke expressed at BC be required when he is testifying before Congress and millions are being updated as to his every utterance? Since we are lead to believe he has a more exact idea of what the future of our economy holds for us than any other economist out there, if he truly believes in the inaccuracy of his profession, shouldn’t he lead with that disclaimer. Even us bloggers put them on our blogs…..
The cold hard reality just may be he does know more, but because he must put on a “happy face” so as to not start a panic, hides it from us all. This was the essence of my previous post on the subject and if it is true, is a worse scenario. The more his “predictive” abilities are wrong, the less faith anyone will have in him or the institution he presides over. When that comes to pass, a certain level of panic/doubt cannot be avoided…
Who knows, maybe we are already there???
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