The Federal government was truly broadsided by the collapse of the housing market if a 2006 transcript is to be believed. According to the recently discovered document while the signs of a distressed market were beginning to show themselves the Fed’s downplayed the risk.
According to Binyamin Appelbaum in a response to the New York Times:
“The officials clearly did not grasp how “deeply intertwined the housing sector and financial markets had become.”
Highlighted in the transcript was then New York Fed leader Timothy Geithner who said:
“We think the fundamentals of the expansion going forward still look good,” he said in December 2006. A few months earlier: “We just don’t see troubling signs yet of collateral damage, and we are not expecting much.”
Geithner’s own incompetence was then backed up by Federal Reserve Chief Ben Bernanke who noted at his first chair meeting in March of that year:
“Again, I think we are unlikely to see growth being derailed by the housing market.”
In September Bernanke appeared to more realistic about the situation, telling those around him:
“I don’t have quite as much confidence as some people around the table that there will be no spillover effect.”
While Bernanke’s comment showed some distrust in the housing market system his thought wasn’t shared by Janet Yellen of the San Francisco Fed who noted:
“Of course, housing is a relatively small sector of the economy, and its decline should be self correcting.”
In fact Yellen was so confident in the ability of the market to correct itself that during the transition from Alan Greenspan to Ben Bernanke she said to Greenspan:
“The situation you’re handing off to your successor is a lot like a tennis racquet with a gigantic sweet spot.”
We all know exactly how wrong the feds were at the time of their comments, ever since 2008 they have been climbing out of quicksand of their own design.
Do you believe the feds were as clueless as they appeared to be in the transcript highlights presented to you?