The Clueless Boston Fed

I thought the cluelessness at the Boston Fed peaked in the mid-1980's. Back then it wasn't just the Austrians that watched the money supply, but most economists and almost all of Wall Street.

This was pre-internet and on Thursday afternoons when the money supply numbers were released, officially known as the H.6 release, the New York Fed was filled with runners and analysts who were there to get the numbers, as soon as they were released. I often partook in the weekly ritual. It was a big deal.

One week, while away from New York City, and in Boston, I stopped by the Boston Fed on Thursday to get that weeks H.6 numbers. No one knew what I was talking about. Finally, I found a lady who thought she knew what I was asking for and said she thought they might "get a copy on Monday." I smiled, said "Thank you," and left the building never ever to return.

The Boston Fed has now topped that mid-1980's performance. Writes WSJ:

Should economists and policy makers have identified the housing market bubble before it burst? The answer is most likely no, says the Federal Reserve Bank of Boston, because economic theory was not up to the challenge.

“Economic theory provides little guidance as to what should be the ‘correct’ level of asset prices — including housing prices,” the new paper published by the bank says. It was written by economists Kristopher Gerardi, Christopher Foote and Paul Willen...“Academic research available in 2006 was basically inconclusive and could not convincingly support or refute any hypothesis about the future path of asset prices.”...“Since bubbles arise even in the most controlled environments, we may need to acknowledge that we do not currently have the ability to prevent a bubble from forming or the ability to identify a bubble in real time,” the paper said

Amazing. Off the top of my head, I can think of at least six economists from the Austrian School who warned of the real estate bubble using Austrian business cycle theory.It is good to know, though, that the Boston Fed does recognize that the Fed can't recognize a bubble. This will be a good paper to bang over legislators heads every time they call for more power for the Fed, in the belief that this will insure that a bubble doesn't occur. We can't point to the paper and with humble satisfaction point out that the Fed admits they don't know how to detect a bubble, and thus it would be impossible for it to regulate against one, and therefore the regulations under consideration should be considered stillborn and be buried with appropriate respect.