Former Fed Governor: Financial Crisis Worse Than Great Depression

Posted In: Central Banks, Depression, Derivatives, Economy, Federal Reserve, Home Prices, Housing, Subprime

CNBC’s Andrew Fisher wrote today:

Economics scholar and former Federal Reserve Governor Frederic Mishkin says the shock that continues to rip through the nation’s economy is actually worse than what was felt during the Great Depression.

“The difference is, we have people on the ball,” the Columbia University professor told CNBC.

Mishkin said he was impressed by the way his former colleagues at the Fed handled crises.

“During all these episodes… everybody stayed very cool, calm, and collected,’ he recalled. “Chairman Bernanke is someone who sits down, is very analytical, thinks through, doesn’t get excited, just, ‘Let’s do the job,’ the staff operated that way, the rest of the board operated that way.”

I, for one, sure hope Mr. Bernanke’s problem-solving skills are a lot better than his forecasting abilities.

Anyone recall the following statements from “Helicopter Ben” over the last couple of years?

Housing Bubble

Testimony given at a Congressional Joint Economic Committee hearing in October 2005 (as reported by Nell Henderson of the Washington Post):

Ben S. Bernanke does not think the national housing boom is a bubble that is about to burst, he indicated to Congress last week, just a few days before President Bush nominated him to become the next chairman of the Federal Reserve.

U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president’s Council of Economic Advisers, in testimony to Congress’s Joint Economic Committee. But these increases, he said, “largely reflect strong economic fundamentals,” such as strong growth in jobs, incomes and the number of new households…

Bernanke’s testimony suggests that he does not share such concerns, and that he believes the economy could weather a housing slowdown.

“House prices are unlikely to continue rising at current rates,” said Bernanke, who served on the Fed board from 2002 until June. However, he added, “a moderate cooling in the housing market, should one occur, would not be inconsistent with the economy continuing to grow at or near its potential next year.”

Derivatives

Testimony given at a U.S. Senate hearing, November 15, 2005:

I think, generally speaking, they are very valuable. They provide methods by which risks can be shared, sliced and diced and given to those most willing to bear it. They add, I believe, to the flexibility of the financial system in many different ways.

And, with respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly.

Subprime Crisis

Testimony given at a Congressional Joint Economic Committee hearing in March 2007:

At this juncture, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.

The big question: Can Bernanke and the Fed fix something they never saw coming in the first place?

Sources:

“Top Economist Mishkin: Worse Than the Depression”
Andrew Fisher
CNBC, September 23, 2008

“Bernanke: There’s No Housing Bubble to Go Bust”
Nell Henderson
Washington Post, October 27, 2005

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