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
Stephen Foley is a former Associate Business Editor of The Independent, based in New York. He left in August 2012. In a decade at the paper, he covered personal finance, the UK stock market and the pharmaceuticals industry, and had also been the Business section's share tipster. Between arriving with three suitcases in Manhattan in January 2006 and his departure, he witnessed and reported on a great economic boom turning spectacularly to bust. In March 2009, he was named Business and Finance Journalist of the Year at the British Press Awards.
Saturday 14 January 2012
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.
- 1 BBC election debate: The one photo that summed up the whole 90-minute leaders debate
- 2 18th century sex toy found in 'toilet of sword fighting school' in Poland
- 3 US? China? India? The 10 biggest economies in 2030 will be...
- 4 'I wish my teacher knew...': Young students share their 'heartbreaking' worries in notes
General Election 2015: David Cameron catching up in polls – but he badly needs a clear lead
South Africa xenophobic attacks: Shops looted and violence on streets of Johannesburg as foreigners are forced to hide in police stations
18th century sex toy found in 'toilet of sword fighting school' in Poland
'I wish my teacher knew...': Young students share their 'heartbreaking' worries in notes
Rebecca Francis accuses Ricky Gervais of using 'influence' to target female hunters after receiving barrage of death threats
The only black face in the Ukip manifesto is on the page about overseas aid
If I’m being racially abused I don’t need a stranger with a saviour complex to rescue me
Ukip is the only main political party to not address LGBT rights in its manifesto
BBC election debate: The one photo that summed up the whole 90-minute leaders debate
Religion isn't growing, it is becoming vigorous in its demise, says philosopher AC Grayling
General Election 2015: Polish prince challenges Nigel Farage to a duel over immigration question
£30000 - £40000 per annum + Benefits: Ashdown Group: Front-End UI Application ...
£18000 - £26000 per annum: Recruitment Genius: They work with major vehicle ma...
£27000 per annum: Recruitment Genius: Domestic Service Only Engineers are requ...
£23600 - £27500 per annum: Recruitment Genius: The Employability Service withi...