Unfortunately, we now are getting a glimpse at the conversations that go on in the august chambers where Fed policy is hatched. And quite honestly, I have heard better monetary discussions in church basements and small-town barber shops than what is being reported here. Of course, what is their downside for getting it wrong? Even so, this is pathetic!
"Dear Mr. Greenspan, I think you're pretty terrific ... "
Follies at the Fed
by DEAN BAKER JANUARY 19, 2012
In keeping with its policy of releasing transcripts with a five-year lag, the Federal Reserve Board just released the transcripts from its 2006 Open Market Committee (FOMC) meetings. There is much there to cause pain and amusement.
In the latter category, there is probably nothing that can beat Treasury Secretary Timothy Geithner (then the president of the New York Federal Reserve Bank) telling outgoing Fed Chairman Alan Greenspan:
“I’d like the record to show that I think you’re pretty terrific, too. 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.”
But there is more than obsequiousness on display here. There is also profound ignorance of the economy among the nation’s top economic policymakers.
Keep in mind 2006 is the year that the $8 trillion housing bubble hit its peak and began to deflate. In other words, this covers the period in which the Titanic hit the iceberg and began to take on water. But no one on this sinking ship is even thinking about the lifeboats.
There is no one in the eight FOMC meetings who suggests that the economy faces any serious turbulence ahead. There is not even discussion that a mild recession could be in sight.
In fact at the last meeting of 2006, we hear Janet Yellen, who was then the President of the San Francisco Bank and is now vice-chair of the Board of governors, comment that:
“there are some encouraging signs that the demand for housing may be stabilizing. … After a precipitous fall, home sales appear to have leveled off. … Finally, the gap between housing prices and fundamentals might not be as large as some calculations suggest….”
Needless to say, this wasn’t quite right. Monthly home sales fell by almost 40 percent over the course of 2007. House prices, which were just edging downward month to month up to that point, would begin to decline far more rapidly. By the end of 2007 there were falling at a rate of almost 2 percent a month.
In addition to the direct impact that this sort of price decline had on the housing sector, it also implied a loss of almost $400 billion a month in housing equity. It was inevitable that a loss of wealth of this magnitude would slow consumption. more