Crisis? Crash? Minutes of US Fed's 2006 meetings reveal little worry

America's top financial experts continued to heap praise on Bernanke as economy collapsed

New York

A blissful ignorance about oncoming financial catastrophe was not confined, in 2006, to members of the public who had never heard of Lehman Brothers. It extended all the way to the top of the Federal Reserve, the US central bank charged with steering the economy.

Minutes of its interest rate-setting meetings from that year, as US house prices began to crumble, show its top officials laughing about excesses in the housing market and what turned out to be signals of trouble in the economy of Iceland, whose subsequent collapse was a harbinger of the global credit crisis. The reputations of the economists who ran the Fed, in particular its previously feted chairman, Alan Greenspan, have long been tarnished by their failure to foresee the crisis, but the newly released minutes take their embarrassment to new levels. The transcripts also threaten to hamper the Fed's efforts to restore its legitimacy in the eyes of the American people at a time when it is under attack as never before.

The revelations are especially bad for the Treasury Secretary, Tim Geithner, who was previously president of the Fed's New York branch. At the first meeting of 2006, he added his voice to a chorus of praise for the retiring Mr Greenspan. "I'd like the record to show that I think you're pretty terrific too," Mr Geithner said. "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."

A committee member, Janet Yellen added: "The situation you're handing off to your successor is a lot like a tennis racquet with a gigantic sweet spot." Unfortunately, the economy was like a tennis racquet: it was full of holes.

Although the Fed team became increasingly aware of problems in the housing market, they laughed them off and consoled themselves with economic models suggesting any effects on the wider economy would be limited. Unbeknown to the Fed, dodgy mortgages based on inflated house prices had infected the entire financial system, yet one committee member was still describing the capital markets as "probably more profitable and more robust" than they had ever been – even at the year's end.

By summer 2007, the housing downturn was starting to take down hedge funds, and big banks started failing in 2008. In December 2007, the US economy went into what became known as the Great Recession.

Start your day with The Independent, sign up for daily news emails
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs General

Recruitment Genius: Web Developer - Junior / Mid Weight

£15000 - £25000 per annum: Recruitment Genius: To support their continued grow...

Recruitment Genius: Marketing Data Specialist

£22000 - £25000 per annum: Recruitment Genius: They are the go-to company for ...

Recruitment Genius: Search Marketing Specialist - PPC / SEO

Negotiable: Recruitment Genius: This is an opportunity to join the UK's leadin...

Recruitment Genius: Sales Administrator

Negotiable: Recruitment Genius: This caravan dealership are currently recruiti...

Day In a Page

Is this the future of flying: battery-powered planes made of plastic, and without flight decks?

Is this the future of flying?

Battery-powered planes made of plastic, and without flight decks
Isis are barbarians – but the Caliphate is a dream at the heart of all Muslim traditions

Isis are barbarians

but the Caliphate is an ancient Muslim ideal
The Brink's-Mat curse strikes again: three tons of stolen gold that brought only grief

Curse of Brink's Mat strikes again

Death of John 'Goldfinger' Palmer the latest killing related to 1983 heist
Greece debt crisis: 'The ministers talk to us about miracles' – why Greeks are cynical ahead of the bailout referendum

'The ministers talk to us about miracles'

Why Greeks are cynical ahead of the bailout referendum
Call of the wild: How science is learning to decode the way animals communicate

Call of the wild

How science is learning to decode the way animals communicate
Greece debt crisis: What happened to democracy when it’s a case of 'Vote Yes or else'?

'The economic collapse has happened. What is at risk now is democracy...'

If it doesn’t work in Europe, how is it supposed to work in India or the Middle East, asks Robert Fisk
The science of swearing: What lies behind the use of four-letter words?

The science of swearing

What lies behind the use of four-letter words?
The Real Stories of Migrant Britain: Clive fled from Zimbabwe - now it won't have him back

The Real Stories of Migrant Britain

Clive fled from Zimbabwe - now it won’t have him back
Africa on the menu: Three foodie friends want to popularise dishes from the continent

Africa on the menu

Three foodie friends want to popularise dishes from the hot new continent
Donna Karan is stepping down after 30 years - so who will fill the DKNY creator's boots?

Who will fill Donna Karan's boots?

The designer is stepping down as Chief Designer of DKNY after 30 years. Alexander Fury looks back at the career of 'America's Chanel'
10 best statement lightbulbs

10 best statement lightbulbs

Dare to bare with some out-of-the-ordinary illumination
Wimbledon 2015: Heather Watson - 'I had Serena's poster on my wall – now I'm playing her'

Heather Watson: 'I had Serena's poster on my wall – now I'm playing her'

Briton pumped up for dream meeting with world No 1
Wimbledon 2015: Nick Bollettieri - It's time for big John Isner to produce the goods to go with his thumping serve

Nick Bollettieri's Wimbledon Files

It's time for big John Isner to produce the goods to go with his thumping serve
Dustin Brown: Who is the tennis player who knocked Rafael Nadal out of Wimbeldon 2015?

Dustin Brown

Who is the German player that knocked Nadal out of Wimbeldon 2015?
Ashes 2015: Damien Martyn - 'England are fired up again, just like in 2005...'

Damien Martyn: 'England are fired up again, just like in 2005...'

Australian veteran of that Ashes series, believes the hosts' may become unstoppable if they win the first Test