Current Weather
The Spy FM

Transcripts Show A Fed With An ‘Embarrassing’ Lack Of Foresight Into Housing Crash

Filed by KOSU News in Business.
January 13, 2012

Yesterday, the Federal Reserve released transcripts of the 2006 meetings of the Federal Open Market Committee. While it’s well known the Fed missed glaring signs of a housing bubble about to burst in a big way, the transcripts show that top officials not only dismissed the warnings, but they were really worrying about the economy growing too fast.

Here’s how the Los Angeles Times frames the story: The transcripts, released Thursday after the usual five-year wait, “reveal in painfully embarrassing detail the high degree of overconfidence and lack of foresight just ahead of the real estate collapse and financial crisis that engulfed the nation.”

The transcripts show that both Ben Bernanke, the Fed Chairman, and Timothy Geithner, now Treasury secretary but at the time the president of the New York Fed, expressed their confidence in the economy time and time again.

The New York Times reports that top officials “laughed about the cars that builders were offering as signing bonuses, and about efforts to make empty homes look occupied. They joked about one builder who said that inventory was ‘rising through the roof.’”

Here’s a choice bit dug up by The Los Angeles Times:

“‘We believe that, absent some large, negative shock to perceptions about employment and earned income, the effects of the expected cooling in housing prices are going to be modest,” said Timothy F. Geithner, the current Treasury secretary, who then was president of the Federal Reserve Bank of New York.

“When Geithner was finished, Bernanke asked, to a round of laughter, ‘Anything to report on co-op prices in Manhattan?’

“‘As in many cases, I am not sure what you can take from the anecdote, but I guess some people say that you see a little of the froth dissipating,’ Geithner replied. ‘But I don’t think the adjustment is acute.

“‘If you see hiring at the New York Fed go up substantially in the market, that will be a good leading indicator of housing prices reverting somewhat,’ he said, prompting more laughter.”

The AP sifted through Bernanke’s comments at the meetings and found that the chairman did perceive danger in the housing market, especially as the year went on. But in December of 2006, about a year before experts said the Great Recession began, Bernanke still said the economy would experience a “soft landing,” meaning “growth would slow enough to cool inflation but not drop into a recession.”

Perhaps, The Wall Street Journal’s Real Time Economics blog found the best bit. During the March 27-28 meeting the Fed’s chief economist, David Stockton described a dire situation, which Bernanke acknowledged but quickly dismissed:

“‘Right now, it feels a bit like riding a roller coaster with one’s eyes shut,’ when discussing his forecast for a modest slowdown in housing. ‘We sense that we’re going over the top, but we just don’t know what lies below.’ Later, he notes that housing is ‘the most salient risk’ to the economy. ‘I just don’t know how to forecast those prices,’ he says of housing prices.

“‘Again, I think we are unlikely to see growth being derailed by the housing market, but I do want us to be prepared for some quarter-to-quarter fluctuations,’ Bernanke says. He identifies housing as a crucial issue, but adds that he agrees ‘with most of the commentary that the strong fundamentals support a relatively soft landing in housing.”

[Copyright 2012 National Public Radio]

Leave a Reply

6AM to 7AM On Being

On Being

On Being engages listeners across the spectrum of belief and non-belief in conversation about life's deepest questions. From autism to the ethics of torture, Krista and her guests reach beyond the headlines to probe faith and meaning, ethics and new ways of being, amidst the political, ecological, economic, cultural and technological shifts that define 21st century life.

Listen Live Now!

8AM to 10AM Weekend Edition

Weekend Edition

Weekend Edition Sunday premiered on January 18, 1987, and was the last of NPR's major newsmagazines to hit air. Since then, Weekend Edition Sunday has covered newsmakers and artists, scientists and politicans, music makers of all kinds, writers, thinkers, theologians and all manner of news events.

View the program guide!

9AM to 10PM Sound Opinions

Sound Opinions

Take two nationally respected rock critics, the latest music news, personal commentary, and exclusive interviews and performances, add a huge pile of records old and new, and the result is Sound Opinions-the world's only rock and roll talk show.

View the program guide!

Upcoming Events in your area (Submit your event today!)

Streaming audio and podcasts

Stream KOSU on your smartphone

Phone Streaming

SmartPhone listening options on this page are intended for many iPhones, Blackberries, etc. with low-cost software applications available to listen to our full-time web streams, both News on KOSU-1 and Classical on KOSU-2.

Learn more about our complete range of streaming services

We're perfecting the patient experience - Stillwater Medical Center