For almost a century, the Federal Reserve has been given the benefit of the doubt by Congress. The voters had not heard about it. Today, this is changing. Most voters don’t have an opinion, but literate voters do. This view is turning negative.
Alan Greenspan resigned just five years ago. Those were the good old days, according to the liberal Washington Post.
The leaders of the Federal Reserve went around the room saluting Alan Greenspan during his last day as chairman of the central bank. Then Timothy F. Geithner, the future Treasury secretary, made a prediction.
“I’d like the record to show that I think you’re pretty terrific, too,” Geithner, who was president of the Federal Reserve Bank of New York, told Greenspan amid laughter on Jan. 31, 2006. “And thinking in terms of probabilities, I think the risk that we decide in the future that you’re even better than we think is higher than the alternative.”
That was then. This is now.
On Thursday, the Fed released transcripts of its meetings in 2006, offering a new window into what was on the minds of some of the nation’s top economic and financial thinkers just ahead of the financial crisis and subsequent great recession. The transcripts, which are customarily released after five years, show that Fed leaders, armed with the best economic data available, had little idea of what was looming less than two years off.
Trusted to look toward the future and make decisions to keep the economy strong, they spent some of their time patting their leader on the back and even found time to joke about what turned out to be early-warning signs in the markets. While Fed officials — including several who are in key positions today — were aware that the nation’s rapid increase in housing prices was coming to an end, they significantly underestimated how much damage the popping of the real estate bubble would cause in the rest of the economy.
That this was published in the Washington Post indicates that the bloom is off the FED’s rose. Also, the gloves are off the bare knuckles of journalists.
In his first meeting as Fed chairman, in March 2006, Ben S. Bernanke noted the slowdown in the housing market. But he said he shared the view that “strong fundamentals support a relatively soft landing in housing,” adding: “I think we are unlikely to see growth being derailed by the housing market.”
The year began with adulation all around for Greenspan. In that January meeting, Roger Ferguson, then Fed vice chairman and now head of the TIAA-CREF financial services group, called Greenspan a “monetary policy Yoda.”
In the six years since, Greenspan’s record — seemingly so sterling when he left the central bank after 18 years — has come under substantial criticism from outside economists and analysts.
It’s about time.
The 2006 transcripts show that Fed officials — like most economists on the outside — considered tremors in the financial markets as not much to worry about. Some were even a source of humor.
These people were blind.
In June 2006, the Fed still wasn’t totally aware of what was happening in the market. A Fed economist reported that “we have not seen — and don’t expect — a broad deterioration in mortgage credit quality.” That turned out to be an incorrect description of what was actually occurring.
The article concludes: “At the end of the year, officials were still optimistic.”
The dimmest bulb in the box was Geithner, the president of the New York Federal Reserve Bank and second in influence only to Bernanke.
“The current weakness in the economy still seems principally to stem from the direct effects of the slowdown in housing on construction activity” and other factors, Geithner said in December 2006. “The softer-than-expected recent numbers don’t argue, in our view, for a substantial reassessment of the risks in the outlook.”