Bernanke Was Right!

Ben Bernanke has been widely mocked for statements like this:

7/1/05 – Interview on CNBC
INTERVIEWER: Tell me, what is the worst-case scenario? We have so many economists coming on our air saying ‘Oh, this is a bubble, and it’s going to burst, and this is going to be a real issue for the economy.’ Some say it could even cause a recession at some point. What is the worst-case scenario if in fact we were to see prices come down substantially across the country?

BERNANKE: Well, I guess I don’t buy your premise. It’s a pretty unlikely possibility. We’ve never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though.

Obviously he can’t predict housing prices, but then no one can.  But he was right about the business cycle:

Jan. 2006:  starts =  2,303,000,   completions = 2,058,000,  average = 2,180,000, U-rate = 4.7%

April 2008: starts = 1,008,000, completions =1,014,000,   average =  1,011,000, U-rate = 4.9%

October 2009: starts = 527,000, completions =  745,000,    average = 636,000.  U-rate = 10.1%

If the great housing construction crash of January 2006 to April 2008 didn’t “drive the economy too far from its full employment path,” I think we can safely assume that no housing crash will ever cause a recession in the US.

Too bad the Fed let NGDP fall in late 2008.

About Scott Sumner 492 Articles

Affiliation: Bentley University

Scott Sumner has taught economics at Bentley University for the past 27 years.

He earned a BA in economics at Wisconsin and a PhD at University of Chicago.

Professor Sumner's current research topics include monetary policy targets and the Great Depression. His areas of interest are macroeconomics, monetary theory and policy, and history of economic thought.

Professor Sumner has published articles in the Journal of Political Economy, the Journal of Money, Credit and Banking, and the Bulletin of Economic Research.

Visit: TheMoneyIllusion

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