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Ben Bernanke: Contrary Indicator

Ben Bernanke: Contrary Indicator

On May 17, 2007 Ben Bernanke, then chairman of the U.S. Federal Reserve System, spoke at a conference sponsored by the bank’s Chicago branch and told his audience the following:

[W]e believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.

Just 18 months later the world economy was on its knees due to the implosion of the subprime housing market, an implosion that ended up spilling over into practically every other part of the world financial system.

Bernanke’s confident speech preceded the highs in the Dow Jones Industrial Average by only a few months and a few hundred points before the index plunged by more than 50 percent. Investment types would style Bernanke’s speech as a contrary indicator—an event, utterance or market statistic that suggests excessive optimism or pessimism in a manner that indicates an imminent and major reversal in the prevailing market trend.

After it was clear that the world financial system had avoided the abyss and the world economy had started to pick up again, Bernanke was hailed as “the man who saved the economy” by Newsweek and was chosen as Time magazine’s “Person of the Year” for 2009.

It was a little like applauding a pilot (read: central banker) who had recently crashed a plane (the economy by creating excessive credit), outfitting him with a new aircraft (costing trillions of dollars in central bank interventions and government bailouts of banks and major industries), and then congratulating him for getting the new plane (revived economy) off the ground.

Recently, Bernanke, whose hero-status seems not to have faded, appeared on CNBC to prognosticate again:

“[The current downturn is] really much closer to a major snowstorm or a natural disaster than it is to a classic 1930s-style depression.” Bernanke said he does expect a “very sharp” U.S. recession, but also a “fairly quick” recovery.

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