Federal Reserve Models Prove Ineffective Or Wrong

What this discussion brings to the surface is why do we need the Federal Reserve in the first place? The debate has been going on for years and one the most out spoken opponents is Ron Paul, now retired from congress. He has argued the Fed is useless and wrong headed, biased in it's approach and for the most part cause more problems then it solves.

Another bright light in the financial arena that has thoughts on the Fed as a useful tool is Steve Forbes who has many misgivings about how the Fed uses it power to control the entire money supply in the country. Many experts and ordinary citizens are uneasy that this is all accomplished by one person?  hmmmm This is like judges that rule from the bench or presidents that use executive orders to rule from the White House.

Of course, Mr Obama has his hand in the bowl as well, there is no way he would allow his progressive socialist agenda to be left out of such an important control item as the money supply, and that means trouble for everyone concerned, that is, every last person in the country.

This all will make more sense if we come to grips with the new reality that we are all just 'sudjects' to the imperial leadership in the White House.

Gauging the Guidance that Models Give the Fed
January 10, 2013
Source: "Gauging the Guidance That Models Give the Fed," Wall Street Journal, December 30, 2012.

The Federal Reserve plans to keep short-term interest rates close to zero until the unemployment rate falls to 6.5 percent. How the Fed decided to make that policy is a little known fact about the central bank.

The Fed uses computer-modeling programs called Ferbus, Edo and Sigma to make predictions about how different policies and events will impact the economy, says the Wall Street Journal.

The main economic model, FRB/US (Ferbus), was launched in 1995 and uses hundreds of mathematical equations to analyze the economy. Different factors can be punched in such as lower interest rates or an increase in government spending and Ferbus will generate a model that predicts the impact on growth and inflation.

The Fed used this model to analyze how long it can keep interest rates low without generating too much inflation. However, the models are deeply flawed.

• They failed to predict the financial crisis in 2008.
• Furthermore, they have overestimated the strength of the economy for several years.
• In addition, they have gaps in how they read and project the economy.
• For instance, they ignore the nuances of the financial system such as how vulnerable banks are to a financial panic and the effect on the broader economy. In 1994, small increases in short-term interest rates led to a sharp rise in long-term interest rates. However, the models didn't predict the financial chaos that such a policy would have.

Fed chairman Ben Bernanke has acknowledged the problem and is working on improving the models to better account for financial crises. Fed officials continue to claim that the economic models are not the only things they look at when constructing forecasts and analyses. Rather, the models help them think about the problem.

Some advocates of the model think that critics are too harsh, arguing that the models have made important strides in recent years to include much more detail on the financial sector.