“Prediction is very difficult, especially if it’s about the future.” – Niels Bohr
I’ve been filtering through some of the newly released 2008 FOMC transcripts (the NY Times has a very good interactive here if you don’t want to go through the actual transcripts) and one thing keeps jumping out at me – even though Fed officials appeared conflicted and “behind the curve” at times, they knew there was major risk to the economy well before the crisis spiraled out of control. For instance, in January 2008 Bernanke said:
“I think a garden variety recession is an acceptable risk, but I am also concerned that such a downturn might morph into something more serious, and I will talk about that in a moment.”
But even given that level of fear, there was no sense that things would get as bad as they did. It just goes to show how hard predicting the future is. Even when you know there’s big time risk involved in a certain market or economic action, you not only have to get the timing right, but you have to get the magnitude right. The Fed seems to have missed the timing in 2007 and then once they got the timing somewhat right they misunderstood the magnitude of the event….