What do Wall Street forecasters and Romanian witches have in common? They usually get away, scot-free, with making bad predictions.

At best, forecasting is a very broad brush thing. As Hayek (and Mises) liked to point out, econometrics is a “pretension” of science. That is, you can’t replicate the hard science when dealing with human behavior, especially in an economy where billions of economic decisions are made every day by individuals rather than “the economy.” Yet that is exactly what Keynesian econometricians at the Fed try to do and why they are mostly wrong. The science of econometric forecasting is dangerous in the hands of policy makers because they think they can use the data to create policy that works. They’ve proven otherwise and their policies have been harmful to the economy. In my lifetime the only ideas that have seemed to explained economic behavior accurately are those based on Austrian economic theory (ATE). I have tried to apply it to current events and it seems to have broad brush predictive accuracy and offers logical explanations of what is going on. Forecasts are hard enough because you are never quite certain you have the right data sets, but, with some humility, it’s pretty good at big picture stuff.

The other “big news” from the Fed is that they once again have lowered their forecasts about the economy. In other words, their previous forecasts were wrong. This is nothing new. Their forecasts have been always wrong and backward looking. Ignore them and hope for the best.

Yes, de-leveraging is a theme of the current crisis. But I think that another important theme is what I call The Era of Expert Failure. As local knowledge becomes increasingly important, the central planners become increasingly ineffectual. Mortgage modifications are an illustration of that. The failure of that approach should be described as Hayek’s revenge.

At some point it has to end and then we revert back to where we were with then a bill to pay either thru higher taxes or from the eventual exit of policy. The only thing that changes economic behavior in a substantive way is policy that has a long term view, not something that will end in 6-12 months.