Bad Models Mistook Housing Bust for Dot-Com Bubble
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May 2 (Bloomberg) -- In a speech last month about thefinancial crisis, Federal Reserve Chairman Ben S. Bernanketrenchantly noted that the initial losses from the dot-combust were about the same size as those from the housingmeltdown -- yet the two episodes had very differenteconomic consequences.
What Bernanke didn’t say was that the reason the Fed,along with every other official forecaster, underestimatedthe depth of the latest downturn so badly is that itsmodels effectively treated the housing collapse as if itwere merely dot-com bust 2.0. And only modest progress hasbeen made toward avoiding that same mistake in the future.