Standard procedure is that the Federal Reserve releases the minutes of its FOMC meetings after three weeks. But transcripts of the meetings aren’t released for five years. That means that now, five years after the fact, we are getting a look at what went on at the Fed on the cusp of the housing crisis.
The 1,197 pages of transcript show what has been called hubris, even fatal conceit, on the part of the Fed. The word “laughter” appears dozens of times. There was laughter when officials talked about builders that had to offer incentives like free cars to move their inventory of new homes. And there were jokes about a builder who was worried because inventory had “risen through the roof”.
Beyond the banter, the transcripts show what has been called an “intelligence failure”.
Ben Bernanke presided over his first meeting as Chairman of the Fed in March 2006. That was the year that the housing bubble peaked. But at that meeting, the chairman didn’t seem too alarmed by what was happening in the housing market. He said that “we are unlikely to see growth being derailed by the housing market”.
But a couple of months later he sounded a little apprehensive: “We are seeing, at worst, an orderly decline in the housing market” but it was unknown “whether the housing market will decline slowly or more quickly”.
At the next meeting, he was more cautious, saying that we were facing “an asset price correction” in housing…one that was “very hard to forecast”. By September, he was clearly worried about the impact on the economy as a whole: “I don’t have quite as much confidence as some people around the table that there will be no spillover effect”.
The following year, home prices dropped, and $7 trillion in home equity has been lost.
The 2006 transcripts reveal a lot. What the pages reveal is not that the Fed was clueless. They didn’t fail to see the dangers in the housing market. They saw the signs. What they failed to do was connect the dots. The New York Times put it best: ‘the problem was not a lack of information; it was a lack of comprehension”. The Fed didn’t recognize how interconnected the housing and financial markets were. They didn’t put the pieces together. And they underestimated the economic damage of a housing bubble when it burst.
That failure and the lack of foresight only highlight the irony of an unusual move by the Fed. The Fed recently sent, unsolicited, a letter to heads of the financial services committees of Congress. The letter included a 26-page white paper written by Fed staff, the intent of which is to “provide a framework for thinking”.
That framework offered up a handful of ideas on how to improve the housing market. But members of Congress, in so many words, told the Fed to mind its own business.
The Fed was criticized for ‘overstepping’ its role, and ‘intruding’ into policy advice.
Chairman Bernanke wrote that the paper was sent to Congress because “restoring the health of the housing market is a necessary part of a broader strategy for economic recovery”. The Fed really sent it because they need Congress to do something. The Fed has pretty much done what it can; it has kept interest rates, and in turn borrowing costs, as low as possible… and that’s not helping.
When he took over as Fed Chairman, Ben Bernanke vowed to avoid fiscal policy debates. But that was 2006. Things have changed. Besides that, we should give credit where credit is due. Bernanke was a continual voice of caution on the risks in the housing market, while other Fed officials exuded overconfidence about the economy. But his voice wasn’t quite loud enough.
There were other voices, of course. There were economists who clearly foresaw the impact of the housing market collapse. The problem was that none of them were on the Fed’s committee.