Newly released transcripts of Federal Reserve Board meetings show that even as disaster loomed, iceberg-like, for the U.S. economy in 2006 because of inflated housing prices, the board remained lagely clueless.
In January, as the Fed met to give a rousing send-off to its retiring long-time chairman, Alan Greenspan, Janet Yellen, then president of the Federal Reserve Bank of San Francisco, struggled to find the right encomium with which to send him on his way.
Unhappily for her in retrospect, she found it:
"It is fitting," intoned Yellen, "for "Chairman Greenspan to leave office with the economy in such solid shape." (One imagines, here, the doric marble columns in the background trembling slightly.) "The situation you are handing off to your successor is a lot like a tennis racquet with a gigantic sweet spot."
A year later, of course, that spot's sweetness had so soured that the U.S. financial system teetered on the brink of collapse. The transcripts document how slow was the Board to appreciate the significance of events going on around them.
At its June meeting, then president of the Federal Reserve Bank of Atlanta George C. Guynn described to fellow members the lengths to which builders were going in oder to cram buyers into houses. As the transcript makes plain, his comments were met with amusement:
"We are getting reports that builders are now making concessions and providing upgrades, such as marble countertops and other extras, and in one case even throwing in a free Mini Cooper to sweeten the deal [laughter]."
The idea that widespread securitization of iffy mortgages might bring down the whole economy or result in the loss of 8 million jobs was given short shrift, though some members, including Susan Bies, expressed misgivings over what she called the mortgage sector's "growing ingenuity."
At the same June meeeting, the preisdent of the Federal Reserve Bank in Dallas compared the economy to a BMW Z4 roadster that, though it might have downshifted, was still zipping along nicely: "We don't see as sharp a correction in the second quarter and looking forward. We are, however, concerned about inflation."
That same attitude prevailed even after the housing sector had begun to waiver and housing prices to fall. Timothy Geithner, then president of the Federal Reserve Bank of New York, said at the Board's September meeting, "We just don't see troubling signs yet of collateral damage, and we are not expecting much," adding later, in December, that he thought "The fundamentals of the expansion going forward still look good."
Chairman Ben Bernanke, Greenspan's successor, sounded a somewhat more cautious note, saying he did not have "quite as much confidence as some people around the table that there will be no spillover effect."