Let’s not let the relatively trivial daily news-feed bury us like so much Seattle snow before pausing to note the story of the Federal Reserve’s obliviousness in 2006 to the gathering crisis. We know more about this because the transcripts of Fed meetings have been released, as required by law. As the New York Times reported, “…the officials, meeting every six weeks to discuss the health of the nation’s economy, gave little credence to the possibility that the faltering housing market would weigh on the broader economy.”
You can read transcripts of the meetings here. So far, too much expert reaction has been a shrug: 1) Surprise events are, well, surprises, or 2) Everybody was sandbagged by the severity of the bubble collapsing, so the Fed isn’t alone. One doesn’t have to be Ron Paul to be concerned about the Fed’s malpractice. Among the bantering complacent around the table was Ben Bernanke, who still is chairman of the central bank, and Timothy Geithner, then New York Fed president and now Obama Treasury secretary.
It was obvious in 2006 that overbuilding was reaching dangerous levels around the country. One result would be that prices could not keep rising to justify the dubious house-flipping and liar-loan financial dodges going on. Also, the U.S. economy had become extremely dependent on house-building, selling, finance and everything connected with this bubble during an otherwise lackluster 2000s. It was all unsustainable. A number of financial journalists reported on this, including homey. NYU’s Nouriel Roubini famously sounded the alarm of impending doom among major economists.
In fact, by 2006 it was clear the economy was in dangerous territory. The Fed, with its supposed expertise in banking, should have been the first to understand how the various derivatives, shadow banking, counterparty relationships and other risky practices that evolved under deregulation would act as accelerants to the crisis. That they didn’t shows the dangerous disconnection of American elites from reality. And such mandarins are always the prisoners of the conventional wisdom. We face a future of discontinuity. If they missed this one, what will they miss in the future? After all, they’re as safe and prosperous as ever.
And Don’t Miss: How a private-equity firm would flip the U.S. for a quick profit || Slate
Today’s Econ Haiku:
We’re still alive here
Rain city ain’t snow city
Flakes, output falling