Federal Reserve Thought Housing Crisis Was Funny in 2006
The transcripts for the Federal Reserve's 2006 meetings were released this week, and with them comes the news that the people in charge thought that the housing crisis was pretty hilarious at the time, and that the biggest problem facing the economy was inflation. That is to say, that the economy was growing too damn fast! And maybe there was slight cause for concern, things that are too good to be true being not usually true and all that. Even so, Timothy Geithner, then the president of the Federal Reserve Bank of New York and now Secretary of the Treasury, thought in December 2006, mere months before the subprime mortgage crisis hit, that "the fundamentals of the expansion going forward still look good."
The New York Times report on the transcripts does not beat around the bush about this: the meetings of that year, it writes:
clearly show some of the nation’s pre-eminent economic minds did not fully understand the basic mechanics of the economy that they were charged with shepherding...The problem was not a lack of information; it was a lack of comprehension, born in part of their deep confidence in economic forecasting models that turned out to be broken.
Government employees don't know anything about anything? Amazing.
The Federal Reserve had plenty of information on what was going on in the housing market: that buyers were being enticed with Mini Coopers, for instance, and that properties were being dressed up so as not to look empty, even though they were. But instead of being concerned about this homebuilder-as-lobbyist behavior, the Reserve board, including the guy currently in charge of what happens to our tax dollars ("He's been right there in the trenches," Obama might maybe say of Geithner's experience), made jokes about it. (There was one person less confident than the others: Ben Bernanke.)
The worst offender appeared to have been Janet Yellen, then the chairman of the Federal Reserve Bank of San Francisco. As Alan Greenspan was preparing to exit as Fed chairman, Yellen remarked:
It’s fitting for Chairman Greenspan to leave office with the economy in such solid shape. The situation you’re handing off to your successor is a lot like a tennis racquet with a gigantic sweet spot.