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Did Janet Yellen Predict the Recession?

No, no, and no.

12:31 PM, Jul 31, 2013 • By ETHAN EPSTEIN
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By February 2007, she thought her predicted correction had already occurred. In a speech, she reported “signs of stabilization in the housing market,” and was pleased to report that, according to Marketwatch, that “housing’s slowdown had [not] spilled into other parts of the economy.” In fact, she said that she was more worried about inflation than the housing downturn.

By April 2008, Yellen did say the economy was “all but stalled,” and warned that housing would continue to be a drag into 2009. But by then, the country was four months into what would prove to be the worst recession in seventy years, and housing prices had been falling for the better part of two years. Anybody sitting in your neighborhood bar could have told you that the economy was in trouble. Praising Yellen’s predictive abilities based on that 2008 speech is akin to lavishing praise on a weatherman whose forecasting method consists of looking out the window during a storm and then breathlessly reporting that it’s raining.

In other words, Yellen’s take on the housing market was . . . pretty much the same as everybody else’s. She underestimated the risks of the housing bubble and only recognized the terrible truth when it was already much too late.

Yet somehow Yellen has managed to gain a reputation for prescience. It’s a testament to the fact that if you have friends in the media who say something enough times – no matter how dubious – it will enter the bloodstream of mainstream political discourse.

But it’s instructive and suspicious that, even when writing online, many of Yellen’s defenders don’t provide any evidence of her purported forecasting genius – they simply argue by assertion. (Princeton’s Alan Blinder, rhapsodizing about Yellen in the Wall Street Journal, was probably the most honest of all of her defenders, when he wrote, “Full disclosure: She is a close friend.”)

Even when they do provide evidence and links that are supposed to prove Yellen’s foresight, they don’t actually corroborate the claims. For example, O’Brien of The Atlantic links to an October 2005 speech, in which Yellen discussed the housing market. But her entire argument regarding housing prices was couched in hypotheticals:  “if house prices fell, the negative impact on household wealth could lead to a pullback in consumer spending,” she said, before pointedly concluding, “My bottom line is that. . . I’m certainly not predicting anything about future house price movements.” She also said that a cooling of housing prices represented a “downside risk” for future economic growth, but that’s hardly the definitive warning that Yellen’s partisans would have us believe. (And don’t forget, she made those remarks in the same month that she gave her famed “no, no, and no” soliloquy.) The Calculated Risk blog, meanwhile, links to two Yellen speeches from 2005 to 2006, in which she said that housing prices might fall. That’s all well and good, but it skirts the real point. The key issue is not that Yellen occasionally mused that housing prices might fall – it’s that she repeatedly argued that, even if they did, the broader economy would only suffer minimal damage.  

Janet Yellen – gender blackmail aside – may prove a fine candidate for Fed chairman. But was she more prescient about the housing bubble and the recession than most? To borrow a phrase: no, no, and no.

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