Gold News

Time to Duck & Cover?

Fed chair Ben Bernanke says everything's fine. Watch out!

"WE HAVE AVERTED the risk of a depression," Federal Reserve Chairman Ben Bernanke said last week, as the editors of Casey Research report.

"Now the problem is to get the thing working properly again."

Appearing on CBS network's 60 Minutes, Bernanke told correspondent Scott Pelley that concerted efforts by the government likely averted a depression similar to the 1930s. He also stated the nation's largest banks are solvent and that he doesn't expect any of them to fail; and that the US recession will come to an end "probably this year."

Is this finally the light at the end of the tunnel for the US economy? We don't want to appear as perpetual gloom-and-doomers, but fact is, when Bernanke tries to predict the future, he's usually wrong.

Prediction, March 2007: The subprime mess is grave but largely contained, Bernanke reassured the Federal Reserve Bank of Chicago in a speech two years ago.

While rising delinquencies and foreclosures will continue to weigh heavily on the housing market, it will not cripple the US economy, the Fed chairman said. "Given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited."

Reality: The median price of a home sold in the US fell to $170,300 in January 2009, down 26% from a year and a half earlier, according to the National Association of Realtors. This housing crash has spread pain more widely than any before it. Home prices fell about 30% during the Great Depression, according to calculations by Yale University economist Robert Shiller. But back then, the nation was less concentrated in urban centers, and much fewer Americans owned homes.

Other housing downturns in recent decades have been regional; this one is national. Prices in the fourth quarter of 2008 fell in nearly 90% of the top 150 metro areas, according to the Realtors group. And 5.4 million homeowners, about 12%, were in foreclosure or behind on mortgage payments at the end of last year.

For what it's worth, the Federal Reserve now estimates home prices could fall 18%-29% more by the end of 2010.

Prediction, Feb. 2008: "I expect there will be some failures" of smaller banks, said Bernanke a little over 12 months ago. "Among the largest banks, the capital ratios remain good and I don't anticipate any serious problems of that sort among the large, internationally active banks that make up a very substantial part of our banking system

Reality: Bear Stearns fell into a tax-funded takeover by J.P.Morgan just one month later; IndyMac Bank failed in July 2008, with $32 billion in assets. Washington Mutual failed in September 2008, the largest bank failure in history with $307 billion in assets. Lehman Brothers, then leveraged 32-to-1, collapsed the same month. Wachovia was sold to Wells Fargo in October 2008, amid concerns about its financial health. Citigroup still scrambles to raise cash from both the government and private sources.

Fortunately for Bernanke, and unlike us at Casey Research, he doesn't make a living by being right about the future. If he did, we strongly suspect that by this time, he would find himself without subscribers.

Thus, it is a mystery to us why the mainstream media still seem to eagerly soak up his every word, much like a devout Catholic would absorb a papal ex cathedra proclamation. But until the last American has woken up to Bernanke's fallibility, that likely won't change.

In the meantime, we recommend using the Fed chair's economic outlooks as a contrarian indicator – if he says the market looks good, run for cover as fast as you can.

Doug Casey is a world-renowned investor and author, whose book Crisis Investing was #1 on the New York Times bestseller list for 29 consecutive weeks, a record at the time.

He has been a featured guest on hundreds of radio and TV shows, including David Letterman, Merv Griffin, Charlie Rose, Phil Donahue, Regis Philbin, NBC News, and CNN; and has been the topic of numerous features in periodicals such as Time, Forbes, People and the Washington Post.

His firm, Casey Research, LLC., publishes a variety of newsletters and web sites with a combined weekly audience in excess of 200,000, largely high net worth investors with an interest in resource development and international real estate.

See full archive of Doug Casey articles

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