Newly released documents show the housing crash took the Federal Reserve completely by surprise

January 13th, 2012

Photo: Andrew Harrer/BLOOMBERG

For today’s FedNews Friday feature we have got some news for you! Some just-released documents that became public Thursday reveal how badly the housing market crash and subsequent economic implosion took the “experts” at the Federal Reserve by surprise. Five years ago, just before the housing market began its downward spiral and at the end of Alan Greenspan’s tenure as the Federal Reserve’s chairman, top Fed officials were hailing him as some sort of economic prophet and even cracking jokes about economic indications that would turn out to be early warning signs of the economic calamity and rampant human suffering to come.

The Federal Reserve customarily releases transcripts of its meetings after five years and the transcripts released this Thursday should give Americans pause to reconsider just how much they should really trust their future, their material well-being, and their happiness to unelected technocrats who meet in secret to steer the lives of 300 million American people and the world’s billions into a “better” tomorrow. In 2006, as the “unsinkable” ship of economic growth hurtled inevitably toward an iceberg, the ship’s captains were carelessly joking and bestowing accolades upon themselves for steering the ship so well…

According to the transcripts: in January of 2006, Timothy F. Geithner, then president of the New York Federal Reserve (now managing the government’s finances as Secretary of the Treasury under Obama) gushed over the work Alan Greenspan had done as Fed Chairman, saying amid laughter from the others: “I’d like the record to show that I think you’re pretty terrific, too, and thinking in terms of probabilities, I think the risk that we decide in the future that you’re even better than we think is higher than the alternative.” The Fed’s vice chair, Roger Ferguson chimed in to call Greenspan a “monetary policy Yoda.” Janet Yellen, then president of the San Francisco Fed (now vice chair of the whole thing under Bernanke– where she still hasn’t learned her lesson) told Greenspan: “the situation you’re handing off to your successor is a lot like a tennis racket with a gigantic sweet spot.”

In addition to revealing to the entire world what a bunch of dorks all these bureaucrats are (and I thought we Silver Circle people were bad for obsessing over monetary policy and loving animation), these remarks show just how clueless everybody at the Federal Reserve was about the very thing that they are supposed to be the most well-informed and best-able to forecast and positively influence. and now the world can see that the giant, fiery head making grand pronouncements, the economic wizard of paper that we thought beyond question or scrutiny, is a mere humbug and “a very bad wizard.” Then again, those who were paying attention should have known this about Ferguson’s “monetary policy Yoda” as far back as the 1970s.

But that ever fatal conceit that underlies bureaucratic central planning is an intoxicant and it blinds those who should know better to the reality of the limits of a mere man like Alan Greenspan. It speaks with a booming voice and says: “Pay no attention to that man behind the curtain!” and the intoxicated worshiper of power listens. If Greenspan really is a Jedi Master, it is because of his ability to use an old Jedi mind trick. Those of you who have watched any of the Star Wars movies know how it works: the Jedi says something to his unwitting target, and the target repeats it back with conviction and belief. It’s something Greenspan has been doing his whole life. Of course the movies also tell us that the Jedi mind trick only works on the weak-minded.

I guess that explains how as late as December of 2006, a full year after the comments above were made at that January meeting, Timothy Geithner was impotent to interpret the signs of impending collapse all around him, signs that others with less privileged knowledge were able to recognize. A full year closer to the crisis, Timothy Geithner, paying no attention to the man behind the curtain, eyes firmly planted on his vision of Greenspan as an infallible oracle and wizard would say: “The current weakness in the economy still seems principally to stem from the direct effects of the slowdown in housing on construction activity. The softer-than-expected recent numbers don’t argue, in our view, for a substantial reassessment of the risks in the outlook.”

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