Safe Investing: Should you trust the Fed?

Safe investing takes discipline. Part of that discipline is to limit the amount of "financial pornography" you allow into your brain. You know, all that junk information that's shoveled at you from every conceivable source.

What about Fed pronouncements? Can we trust the Fed to give us good information? Certainly, the various Fed websites contain lots of data that's interesting and helpful. But more specifically, can we assume they understand what's happening right now in the economy or that they have a good idea as to what we can expect in the future, say over the next 12 - 24 months?

We don't doubt that Bernanke and crew are pretty smart guys - as smart as academic economists can get. But it's important to ask whether we can trust their judgment. After all, they have worked with the Treasury Department to spend or commit over $12.8 trillion (according to date compiled by Bloomberg as of March 31st) to deal with our current financial crisis and economic recession. Is it reasonable to assume their policies, including the various bailouts we've all read about, will work?

To find out, let's turn the clock back to July 20th, 2007 (almost two years ago now). We'll look at what they said then and see how good their judgment was. With the first wave of the sub-prime crisis hitting and Bear Stearns beginning its death spiral, Ben Bernanke told us to expect total losses of about $100 billion. Not to worry.

It wasn't long until Bear Stearns finally expired for good and the billions of losses began accelerating into the trillions we've all become so familiar with. A recent Federal Reserve report estimates the loss of wealth in American households alone as topping $11 trillion.

How could Bernanke have been so far off? Did he know what was coming? Was he just trying to avoid panic? Or was he as clueless as his words indicated at the time?

Think about it. Either way, he wasn't a very reliable source of good information or opinion, was he? If he knew the truth and was just trying to keep us all calm, you would not have wanted to make investment decisions based upon what he said.

One of the definitions of "trust" is "firm reliance on the integrity, ability, or character of a person or thing." How did Bernanke stack up? That means that he was not someone to be trusted, doesn't it?

Safe investing requires, among other things, care and vigilance in making decisions and monitoring your investments - and reliable sources of information, knowledge and wisdom. Use the Fed's data, if you find it helpful. But don't trust their pronouncements or their judgment.