Fed Apparently Blindsided By Financial Crisis

A recent Wall Street Journal article discusses documents released Thursday that contain transcripts from closed-door Fed meetings during 2006.  These transcripts include statements made by Fed chairman Ben Bernanke and other Fed officials, including Timothy Geithner (President of the Federal Reserve Bank of New York at the time and now U.S. Treasury Secretary), that suggest that they were more or less blindsided by the magnitude and speed at which housing prices would decline and the resulting financial crisis.  The following image from the article shows housing sales and the share of mortgages on which payments are past due by 90 days or more from 2001 to 2011.  Each graph indicates the two dates (labeled 1 and 2) during which the meetings that were included in the recently released documents occurred in 2006, in addition to comments made at those meetings by Bernanke and Geithner.  As the first graph shows, U.S. sales of existing homes was slightly down at roughly $6.3 million from its peak in 2005 of over $7 million at both meetings. They had not yet started on the rapid decline that began almost immediately after the second meeting and ultimately resulted in sales lower than $4 million by 2009.  Similarly, the second graph shows that the share of mortgage payments overdue by more than 90 days were up slightly during both meetings but had not yet began on the rapid climb from roughly 1% in 2007 to 5% in 2010.  Furthermore, the comments of the Fed, Geithner, and Bernanke included alongside the graphs suggest a major lack of foresight on all of their parts (most notably Bernanke’s prediction that a “soft landing” was the “likely scenario”).  As the article points out, the release of these documents may have been particularly ill-timed for the Fed with criticism mounting against it, as illustrated by Ron Paul’s “end the Fed!” chant after the New Hampshire primary.  However, at least one former Fed governor whose statements were included in the transcripts, Susan Bies, came out unscathed with her warnings of the risks of mortgage-backed securities and household debt during one of the 2006 meetings.

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