That thought hadn’t occurred to me. But I still wonder whether Bernanke & Co. are getting unduly optimistic assessments. I was really surprised when Bernanke said subprime losses would be $50 to $100 billion. That was a very low estimate. Similarly, I suspect the banks the Fed regulates have been either spinning their performance, or kidding themselves, and therefore the Fed along with them, about the seriousness of the credit crisis.

Priceless…

The real question is whether that surprise is real or feigned though. Did the Fed really not know what all the other experts were saying? Or were they just afraid they’d be forced to do something if they acknowledged reality?

There’s textbook psychological theory about this situation called avoidance-avoidance conflict: Psychological conflict resulting from the necessity of choosing between two undesirable alternatives. In this case, if the Fed acknowledges the experts, the markets might tank because the Fed is now confirming the pessimistic analysts. And if they don’t acknowledge it and do something about it, things can continue to worsen.

And the textbook psychological response to avoidance/avoidance conflict? Paralysis of action.

I’m beginning to think the behavioral economists are on to something after all