October 19 2007 – the twentieth anniversary of Black Monday – saw the Dow Jones Industrial Average shed 367 points, or 2.64%. That is modest comparing with 1987’s historical market crash, in which the Dow free-fell 22.6% to evaporate around $500 billion market value. But today’s situation may be worse in its enormous uncertainty. Instead of an epic crash right in the beginning and in one crisp drop, the market today is fraught with fear: is the worst still ahead? If it is, when?
Since the beginning of the year, sentiment has been swinging. The past week may be the nadir so far. The pessimists made the loudest noise, deafening the optimists and the middle ground camp. CEOs, economists and poll result that believe a recession is near made the headlines, well fitting to the stock market down turn. Of course, when the market goes up, bet the optimists to gain the dominant voice.
Who is right in the mist of the guessing game? The Caterpillar CEO Jim Owens who believes the U.S. is near or already in a recession, or the International Monetary Fund who lowered the economic outlook but maintained a moderate growth next year? Moreover, is economic reality perceivable?
Listen to Fed chairman Ben Bernanke. In an academic and invitation only conference in St. Louis, Bernanke combed through past research and studies on monetary policy last Friday. The chairman avoided speaking for himself in a strict “literature review” style and terminology-filled talk. But he did make certain about one thing: uncertainty.
“Uncertainty about the current state of the economy is a chronic problem for policy makers,” Bernanke said. “At best, official data represent incompetent snapshots of various aspects of the economy, and even then they may be released with a substantial lag and be revised later.”
This resonates with what happened last month when the Labor Department revised payroll figures in August from a net loss of 4,000 jobs to 89,000 gains. The chairman then looked back on efforts to respond in the face of two other economic uncertainties: the structure of the economy and the way in which the public form expectations about future economic developments and policy actions.
But the bottom line, Bernanke stressed, is that “uncertainty…is a pervasive feature of monetary policy making.” The uncertainty includes the state of the economy, the economy’s structure and how the public would react. Fundamentally, the chairman ended: “our discussion of the pervasive uncertainty that we face as policymakers is a powerful reminder of the need for humility about our ability to forecast and mange the future course of the economy.”
Compare this with Caterpillar’s Jim Owens’ scary prediction. At least Bernanke is honest that he does not know the future.
