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Link to Part I: "It's All Academic"

Bernanke Consistently Misunderstood the Economy and Ignored the Developing Crisis for Years

During the Housing Bubble Bernanke indicated that “strong fundamentals” were the main force behind the rise in home prices. 

As the crisis began and steadily spread throughout the housing construction and mortgage industries Bernanke consistently dismissed the threat as minor and compartmentalized.  He has uniformly overestimated the strength of the economy and underestimated the influence of visible, expanding, financial crises. 

A representative sample of the Bernanke's insights and quotes on the economy are included below in sequential order:

July 29, 2005 (Reuters)
"We've never had a decline in housing prices on a nationwide basis," he said, "What I think is more likely is that house prices will slow, maybe stabilize... I don't think it's going to drive the economy too far from its full-employment path, though."

October 27, 2005 (Washington Post)
Ben Bernanke does not think the national housing boom is a bubble that is about to burst, he indicated to Congress last week, just a few days before President Bush nominated him to become the next chairman of the Federal Reserve.

U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president's Council of Economic Advisers, in testimony to Congress's Joint Economic Committee.  But these increases, he said, "largely reflect strong economic fundamentals," such as strong growth in jobs, incomes and the number of new households.

May 17, 2007 (AP)
Federal Reserve Chairman Ben Bernanke said Thursday that he didn't believe the growing number of mortgage defaults would seriously harm the economy

"We believe the effect of the troubles in the subprime sector on the broader housing market will be limited and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system,"

The "vast majority of mortgages, including even subprime mortgages, continue to perform well."

He said that past gains in home prices have left most homeowners with significant amounts of equity in their houses and the growth in jobs and incomes should allow most households to keep their financial obligations in a manageable range.

June 5, 2007 
"At this point, the troubles in the sub-prime sector seem unlikely to seriously spill over to the broader economy or the financial system." 

July 19, 2007 (Market Watch) 
The Fed chief repeated that the problems in the subprime-mortgage market haven't caused a system-wide credit crunch. 

The system-wide credit crunch would follow a month later.

Jan. 10, 2008 (AP) 
“The Federal Reserve is not currently forecasting a recession,” Bernanke said, fielding questions after his speech.  It is, however, “forecasting slow growth,” he said. 

December 1, 2008 (The New Yorker) 
Bernanke says that he was “mistaken early on in saying that the subprime crisis would be contained.”

May 5, 2009 
“We continue to expect economic activity to bottom out, then to turn up later this year,”

For four years Bernanke has consistently underestimated the risks and overstated the health of the economy.  How does the Fed Chairman retain any credibility on the subject?  It is frightening that the person charged with designing and implementing monetary policy to resolve the worst financial crisis since the Great Depression has clearly demonstrated such a complete lack of economic understanding. 

Link to Part III: “Misidentifying the Cause, Misdiagnosing the Cure and Doing More Harm than Good”