THE BASIS POINT

Preview of Bernanke Testimony April 2, 2008

Tomorrow Fed chairman Ben Bernanke will give his economic outlook on Capitol Hill to the Joint Economic Committee. The statement shouldn’t diverge from what we’ve heard so far: recent monetary policy moves are made in a crisis mode, inflation is still a concern, they might hike rates back up just as aggressively if inflation becomes a problem, the Bear Stearns rescue was done to save the broader credit markets from spiraling. Then the Q&A will start, and all his consistent messaging will get washed out by lawmakers who don’t even know how markets work.

In addition to being asked why the government would bail out a bank and not consumers, he’s also likely to be asked about his July 2007 projection of $100 billion in bad sub-prime debt. To date, actual write-downs are $230 billion. Also consider the point below that we made August 13, 2007:

“Between 2004 and 2006, the time when lender guidelines were flimsiest, about 14 million families purchased homes at an average cost of $250,000. Even in conservative scenarios, that 2 year pool alone could contain as much as 10 times more than the $100 billion of bad sub-prime debt Ben Bernanke estimated just 3 weeks ago.”