Government Seeks New Way to Predict Economic Crises, Bernanke Says
Princeton, New Jersey, United States (AHN) – Government economists are revamping the economic models they use after being surprised by the recession that started in December 2007, Federal Reserve Board Chairman Ben Bernanke said Friday.
“From now on, we are going to be much more attentive to the system as a whole,” Bernanke said.
He spoke at Princeton University in New Jersey, where he described what went wrong to cause the recession and how the federal government plans to prevent similar crises in the future.
“Our system simply did not catch those problems,” Bernanke said.
He was referring to economic forecasting models that focus on major financial institutions to predict what will happen with the U.S. economy.
The models consist of mathematical calculations based on data about how various industries are performing.
The models used to make predictions overlooked the impact of money markets and how investment banks handled their customers’ money, Bernanke said.
Instead, the forecasting models focused on traditional banks, which operate under tight government regulation.
Private investment firms operate under looser regulations.
Sweeping reform legislation approved recently by Congress seeks to eliminate any loopholes that allow private firms to jeopardize the U.S. economy, Bernanke said.
There will be no more financial firms that are “too big to fail” without dragging down the rest of the economy, he said.
Instead, government regulators have new procedures to prevent the firms from failing or to control the losses they might bring to their investors.
He urged economists to develop better economic forecasting models.
The models used by the government now do a good job of predicting how the economy will perform in good times.
“The standard models were designed for these non-crisis situations,” he said.
However, “the complexity of our economic system” created too many unknowns about when a crisis would occur, Bernanke said.
When economists were asked after the recession started why they failed to predict the crisis, they responded that, “They did not know what they did not know,” Bernanke said.
He discussed an announcement this week by the National Bureau of Economic Research, which declared the U.S. recession ended in June 2009.
The report was widely ridiculed because of an unemployment rate that remains at recession levels and foreclosures that are forcing millions of Americans out of their homes.
“All that means is the economy is no longer contracting,” Bernanke said.
Economic growth remains slow and is likely to continue at a slow pace.
“Recoveries that follow a financial crisis tend to be slower than other recoveries,” said Bernanke, who is considered an expert on the Great Depression of the 1930s.
The U.S. economy faces ongoing struggles because of the national debt and “entitlements” such as Social Security, Medicare and Medicaid, he said.
Because of an aging population that will become eligible for the entitlements and government overspending, the federal debt “will become unsustainable in a few decades,” Bernanke said.
He suggested no new solutions to the debt problem.
However, he did say the Obama administration’s response to the recent recession averted a greater disaster.
“It could have been much worse,” Bernanke said. “We avoided what could have been a global meltdown.”
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