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Home Publications Blogs Beat the Press Release of Fed Transcripts Shows Fed Scary Ignorant in 2008, WaPo Scary Ignorant in 2014

Release of Fed Transcripts Shows Fed Scary Ignorant in 2008, WaPo Scary Ignorant in 2014

Saturday, 22 February 2014 09:09

It's great to be an economist in a top policymaking position in the United States. Unlike dishwashers, cab drivers, and most other workers, you are not held accountable for the quality of your work. We already knew that, since almost none of the people responsible for allowing the housing bubble to grow large enough to collapse the economy have paid any career price. (Ben Bernanke is praised for avoiding a second Great Depression. Talk about setting the bar low.)

Anyhow, the release of the 2008 transcripts of the Fed's Open Market Committee (FOMC) meetings once again show a group of people that is frighteningly ignorant of the economy. The housing market was already in a full-fledged collapse by the end of 2007 with prices falling at the rate of 1.5 percent a month. That translates into a loss of $300 billion in household wealth every single month. Yet the transcripts show the Fed debating whether the economy would see a recession until well into 2008. (The pace of decline eventually accelerated to 2.0 percent a month.)

In the transcript of an early January phone call, Dave Stockon presented an update of the Fed's forecasts which included this line:

"House prices have come in a touch lower than we had forecast. We have also lowered our projection on the level of house prices about 1 percentage point in this forecast. Taken together, those lower equity prices and the lower house prices take 0.1 off growth in 2008 and 0.2 off GDP growth in 2009."

Yeah, a touch lower, and reducing growth by 0.1 percentage point in 2008. This is pretty amazing stuff. It's almost as though they didn't have access to the data showing that house prices were already plunging.

The other item that is amazing in these transcripts is that no one seems to know about the Census Bureau's data on housing vacancies. Vacancy rates of ownership units were already about 50 percent above normal levels by the end of 2007. The vacancy rate on rental units was about 30 percent above normal levels. What did the Fed folks think this implied for house prices?

Incredibly, the first mention of vacancy rates in the transcripts doesn't come until June. Maybe someone should give the FOMC a short lesson on government data sources. If they had seen the vacancy data they would have even less excuse for being surprised by the plunge in house prices, unless they also need an intro course on supply and demand.

The transcripts tell a story where the FOMC is seeing the economy collapse around it and is largely clueless to what is taking place. In fairness, there was little it could do to prevent the collapse at that point, but it is still hard to believe that people who are so ignorant of the economy are able to get paid for this work.

As far as the Post coverage of the release, the piece tells readers in reference to the September meeting near the peak of the financial crisis:

"Even so, Bernanke thought the Fed had probably done enough, according to newly released transcripts. So he recommended that the central bank leave its key interest rate unchanged — a move the Fed would come to regret."

Really, the Fed came to regret not lowering the federal funds rate in September of 2008? What difference exactly would this have made in the financial panic and the collapsing of the housing bubble? If we had lowered the federal funds rate to zero at that point can anyone think that the subsequent set of events would have played out very differently? That's absurd on its face, but I suppose it would at least mean that the FOMC members were not oblivious to the fact that the economy was sinking all around them.

As it is, these transcripts should make readers furious that the FOMC members were getting big paychecks for their work and will enjoy fat pensions in retirement. Unlike workers in Detroit and Chicago, they did mess up on their job, big-time. Read em and weep




Since some folks asked, of course I saw the recession in 2008. I had been warning about the bursting of housing bubble causing a recession since 2002. See here, here, and here for a few of my columns from 2008. And the material on the housing bubble is here. Seeing this one coming was easy for folks who understood the economy. Unfortunately, it seems that not understanding the economy was and perhaps still is a job requirement for holding a top policy position.

Comments (5)Add Comment
written by skeptonomist, February 22, 2014 11:37
The Fed actually started dropping federal funds in August 2007. There was a pause in early 2008 as oil price and inflation spiked, but the drop resumed in August 2008 and federal funds averaged 0.39% in November 2008. The idea that slightly faster action in 2008 would have prevented a crash and recession is absurd. And the Fed had actually started raising federal funds in early 2004, well before the housing bubble peaked - that does not seem to have safely killed the housing bubble, does it? There is no evidence that central-bank interest rate moves have anything like the effect on the overall economy that monetary "theory" assumes.

Greenspan and Bernanke were apparently clueless about the growth of the housing bubble, and now we see that the FOMC was clueless about the collapse as well. Why would anybody assume that central bankers know what they're doing and why should anybody pay attention to what they say? Yet Dean and others continue to claim that pronouncements by the Chairman could by themselves control the economy. Supposedly if the Chairman had said that there was a housing bubble, all the bankers would have cut back on their highly profitable lending or home buyers would have given up the idea of owning a home - really? And now if the Fed declares that if inflation henceforth will be 6% this will cause producers to raise prices or suddenly start investing and hiring (or something).

Credit markets must pay close attention to the interest-rate moves of the central bank because short-term rates directly affect their profits. This does not mean that the central bank controls prices, investment or hiring - decisions on those things are made on different bases, most importantly on the basis of current demand. Economists have a very bad habit of projecting their own beliefs in certain unproven "theories" onto the people who actually make decisions in the economy.
written by Arthur Wilke, February 22, 2014 2:07
Dean Baker highlights that publicly available data such as relating to the emergence of a housing bubble did not factor into deliberations of the Fed’s Open Market Committee (FOMC). And from my still not finished reading of the recently released 2008 FOMC transcripts, there’s no indication of input from the hundreds of employed and contract economists working for the Federal Reserve.

Of interest is the kind of information that two Federal Reserve officials, Richard Fisher and Janet Yellen, used to portraying economic conditions at the time they were meeting in 2008. As Annie Lowrey reports ( (“How the Fed Saw a Recession, Then Didn’t, Then Did,” New York Times, February 22, 2014), Richard Fisher references 30 C.E.0.’s “outside of housing . . . [reporting] the economy trending into negative territory.

Dr. Yellen (Nathaniel Popperfed in “As Crisis Loomed, Yellen Made Wry and Forceful Calls for Action,” New York Times, February 22, 2014) relayed vignettes of surgeons and dentists reporting patients “deferring elective procedures,” a waiting list on an exclusive club shrinking and “employees at her bank who ‘had their home equity lines slashed’.” She also reported of one of the Federal Reserve Bank of San Francisco workers had “deferred a planned home renovation project . . . . If that’s what happening bank workers, she went on, “I can only imagine how hard it must be to get a loan if you have a merely average credit rating.”

It would appear if official data are ignored, economists’ storehouse of research isn’t consulted, assuming it has value, by the Federal Reserve Board, then maybe some ethnographic training to interview taxi drivers, home owners, consumers, etc. might be a more worthwhile endeavor. While vignettes are suggestive, representative reports are still recommended.
Just watch CBS
written by Mark, February 22, 2014 7:44
Watching CBS News on Friday during the local news and
the world news, I was lead to believe that they (The FED)
was in complete control the whole time and that every
action they took was swift and accurate......
They pointed out, more than once, that Ben B. and Janet Y. were fully aware, in control, and doing everything
right, "even sometimes in measured steps"........

Go Figure.......
but the hoipoi got it right
written by BKKGuy, February 22, 2014 7:51
If my memory serves, six months before the 2007 recession and six months before the 2001 recession public opinion surveys show that a large percentage of ordinary people (65%?) believed we were in or about to enter a recession. At the same time the economists polled by Bloomberg overwhelmingly missed it. So, the folk got it right.

You would think the media would then pay more attention to the public's calls on the economy rather than celebrity economists, but you would be wrong.
Seeing same "data rumblings" today
written by jumpinjezebel, February 23, 2014 1:30
Watching the Talking Heads on TV and CSpan say that we're in for "good" growth in the future while Housing Starts plummet and the Manufacturing Index shrinks again (along with other things) makes me wonder if the crossing lights aren't flashing but the driver is blind to them - again.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.