Why the Fed Missed the Housing Bust

The LA Times (Jan 12, 2012) recently highlighted the cavalier attitude of Federal Reserve officials in 2006 just before the housing bubble burst.

While it’s unclear what purpose the article serves other than to suggest through 20/20 hindsight that key Fed policymakers (including Bernanke and Geithner) were clueless about the state of the economy and implicitly asleep at the wheel (Paulistas take note!), the article fails to recognize that every mainstream macroeconomic forecaster missed the call. Some were warning of the bubble and its unsustainability, but the professional forecasters failed to predict the timing or depth of the bust, and none of the models (that I”m aware of) predicted the turning point. It’s really a warning about putting faith in experts rather than markets. I discuss this is a bit more detail over a National Review’s blog “The Corner,” (see also my NR post here) and readers might be interested in also taking a look at an earlier blog post here.