Mortgages: Should We Jail Optimistic Economists?

In Italy seven people have been indicted for failing to predict an earthquake that killed more than 300 people.

“Six Italian seismologists and one government official will be tried for the manslaughter of those who died in the earthquake that struck the city of L’Aquila on 6 April 2009,” reports Nicola Nosengo with Nature News.

“The seven were on a committee that had been tasked with assessing the risk associated with recent increases in seismic activity in the area. Following a committee meeting just a week before the quake, some members of the group assured the public that they were in no danger.”

The prosecutor, according to the story, “acknowledged that the committee members had no way of predicting the earthquake, but he accused them of translating their scientific uncertainty into an overly optimistic message.”

I can’t imagine any circumstances under which scientists should be answerable for something as now unpredictable as earthquakes, but the concept of holding people in authority responsible for being “overly optimistic” in the face of uncertainty has a lot of appeal, especially in the realm of mortgages, loans and finance.

Maybe something less drastic than jail. How about a $3 fine for every overly optimistic prediction or commentary? We could even establish a federal office to search for potential offenders, the Bureau of Unbelievable Narratives and Commentary, or BUNC.

Do you agree? Consider these examples:

1. “Most of the negatives in housing are probably behind us,” said former Federal Reserve Chairman Alan Greenspan in 2006, as quoted by Reuters. “The fourth quarter should be reasonably good, certainly better than the third quarter.”
2. “At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained. In particular, mortgages to prime borrowers and fixed-rate mortgages to all classes of borrowers continue to perform well, with low rates of delinquency.” Ben S. Bernanke, chairman of the Federal Reserve, March 28, 2007.
3. “House prices are unlikely to continue rising at current rates,” said Bernanke, who served on the Fed board from 2002 until June. However, he added, “a moderate cooling in the housing market, should one occur, would not be inconsistent with the economy continuing to grow at or near its potential next year.” The Washington Post, October 27, 2005.
4. “It just won’t go away,” said David Lereah in August 2005 when he was the chief economist with the National Association of Realtors. “Bubble talk continues to be the topic on everyone’s mind from Wall Street to Main Street. With home prices nationally climbing at a double-digit pace, more and more media and market analysts are now subscribing to an apocalyptic view of the housing markets. But perception is far worse than reality. Rest assured there is no imminent disaster awaiting the housing industry.”
5. “On the one hand, we have a pent-up demand from the four million jobs added to our economy over the past two years of sales decline,” said Lawrence Yun, chief economist with the National Association of Realtors, in 2008. “On the other, consumers continue to wait for additional signs of market stabilization. There are more people with financial capacity now than in 2005, but many are trying to market-time their purchase. As a result, the exact timing and the strength of a home sales recovery is a bit uncertain. A meaningful recovery in existing-home sales could occur as early as this spring, or it may be further delayed toward late 2008.”
6. “Since reaching a cyclical bottom last June, pending home sales have posted an overall gain of 24 percent and demonstrate the market is recovering on its own. The index means modest near-term gains in existing-home sales are likely, which would be even stronger if tight mortgage lending criteria returned to normal, safe standards.” Lawrence Yun, chief economist, National Association of Realtors, April, 2011.
7. “There is no recession,” said Larry Kudlow in 2007. Kudlow, who later became the Director of the National Economic Council under President Trump, said that “despite all the doom and gloom from the economic pessimistas, the resilient U.S economy continues moving ahead ‘quarter after quarter, year after year’ defying dire forecasts and delivering positive growth. In fact, we are about to enter the seventh consecutive year of the Bush boom.”

Optimistic Economists & Reality

Maybe, also, there should be a bonus for candor:

“I worked for an association promoting housing, and it was my job to represent their interests,” David Lereah, a former chief economist with the National Association of Realtors, told Money magazine in 2009. “If you look at my actual forecasts, the numbers were right in line with most forecasts. The difference was that I put a positive spin on it. It was easy to do during boom times, harder when times weren’t good. I never thought the whole national real estate market would burst.”

“The only function of economic forecasting is to make astrology look respectable,” said John Kenneth Galbraith.

As to those Italian scientists, I suspect their best defense will come from a former chairman of the Federal Reserve.

“I guess I should warn you,” said Alan Greenspan, “if I turn out to be particularly clear, you’ve probably misunderstood what I’ve said.”

(Photo by Mitchel Lensink on Unsplash)