Essential Reading: Federal Reserve 2006 transcripts on housing bubble

In News by DJ Pangburn / January 12, 2012

Essential Reading: Federal Reserve 2006 transcripts on housing bubble

In 2005 I believe it was, while still in college, I had a conversation with my then roommate who was at the time a Finance & Investment and Political Science student at the University of Wisconsin-Madison, and has since worked at several investment banks and hedge funds as an analyst. He clued me in to a gathering storm, as it were.

He dropped the unexpected bomb that the housing market would soon collapse and, further, that people within the finance and investment sector knew damned well it would. There was almost a nonchalance about the way he delivered this news to me, as if it were all a matter of course, a mere trifle, which I now interpret as foresight that the world of finance and investment would move on, ruthlessly in fact, after the fall.

What occurs to me now—indeed, it occurred to me in 2008 as well—is that if a 23 year old business student knew that the artifice was crumbling, and either gathered it from lectures, business school conversation, or Wall Street investors sounding the alarm, then it followed that men deep in the midst of the housing bubble and along its periphery were aware of the implosion to come, too.

We know this now, of course, but most Americans did not know the truth in 2005 or 2006. Its reach was rather limited. Naturally, one of the systems at the very center of this awareness was the Federal Reserve. Before we come to the recently published 2006 Federal Reserve transcripts on the housing bubble, I’d like to turn to one of my favorite quotes vis-à-vis banking.

Andrew Jackson once stated, according to Stan V. Henkel’s book “Andrew Jackson & The Bank of the United States,” which refers to the minutes of the Philadelphia committee of citizens sent to meet with President Jackson (February 1834):

Gentlemen! I too have been a close observer of the doings of the Bank of the United States. I have had men watching you for a long time, and am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves. I have determined to rout you out, and by the Eternal, (bringing his fist down on the table) I will rout you out!

One must wonder what Jackson would think of the Federal Reserve.

The 2006 Federal Reserve transcripts include such figures as Alan Greenspan, Timothy Geithner, Janet Yellen and Ben Bernanke, amongst others.

In the January 31, 2006 Meeting of the Federal Open Market Committee, after a lot of collective felatio involving honors, titles, motions, seconds, votes, congratulations, nominations, Alan Greenspan’s last hurrah, blah, blah, blah, some talk of pensioners, retirees, foreign currency markets, etc.,—indeed, a certain calmness in the face of economic disaster—they achieve little more than nothing. Geithner, however, deserves mention for the sheer grandiosity of his fellating of Greenspan.

“I’d like the record to show that I think you’re pretty terrific, too,” states Timothy Geithner. “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.”

We do get a rare piece of honesty from Greenspan, however, when he says in reference to long-term economic forecasting, “We have enough trouble forecasting nine months.” I would argue that it’s not so much that they have trouble forecasting the economy, but an institutional incapacity, due to the financial and political waters in which the board swims, to refrain from telling the truth to the American people for fear of panic. Anything less would be career suicide.

And there’s not a little denial or perhaps wishful thinking when economist David J. Stockton says, “With respect to house prices, the recent data and anecdotes also have pointed to some weakening.” Stockton added, “the bottom line is that, after contributing importantly to the growth of real GDP over the past four years, residential investment is expected to decelerate sharply this year and to turn down a bit in 2007.”

Housing prices didn’t just decelerate, the entire housing market crashed, and now David J. Stockton is the Chief Economist to Ben Bernanke and thus a man of some influence at the Federal Reserve. Perhaps this explains why Bernanke states in the March 27-28th meeting, “Again, I think we are unlikely to see growth being derailed by the housing market, but I do want us to be prepared for some quarter-to-quarter fluctuations,” but predicts a “relatively soft landing in housing.”

It’s great to see that we have visionaries holding together the economic fabric of the world.

The material and technical language in the Federal Reserve 2006 transcripts can be difficult, even esoteric to laymen, but they are certainly worth a read.

Head over to Federal Reserve website to read the transcripts.