It is shocking — and a little frightening — to see how clueless and inept the people in charge of our money supply really are. Recent releases of federal reserve open market committee transcripts clearly show the federal reserve completely missed the housing bubble, and they grossly underestimated its impact on the economy. If policy makers do not identify the problem, they can’t craft policies to properly react to the problem. The people in charge at the federal reserve under Alan Greenspan — many of whom are still there — are embarrassingly inept.
“Dear Mr. Greenspan, I think you’re pretty terrific … ” Treasury Secretary Timothy Geithner (then the president of the New York Federal Reserve Bank)

The Fed’s FOMC is supposed to steer the US economy to prosperity. As we now see, it was completely rudderless in 2006
Dean Baker — guardian.co.uk, Wednesday 18 January 2012 11.42 EST
In keeping with its policy of releasing transcripts with a five-year lag, the Federal Reserve Board recently released the transcripts from its 2006 Open Market Committee (FOMC) meetings. There is much there to cause pain and amusement.
In the latter category, there is probably nothing that can beat Treasury Secretary Timothy Geithner (then the president of the New York Federal Reserve Bank) telling outgoing Fed Chairman Alan Greenspan:
“I’d like the record to show that I think you’re pretty terrific, too. 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.”
I think the probability is high of Alan Greenspan’s legacy being viewed as a complete failure. His guidance of the fed, including the failure to regulate credit default swaps among other transgressions, led to the economic collapse of 2008. He was the architect of Armageddon.

But there is more than obsequiousness on display here. There is also profound ignorance of the economy among the nation’s top economic policymakers.
Keep in mind: 2006 is the year that the $8tn housing bubble hit its peak and began to deflate. In other words, this covers the period in which the Titanic hit the iceberg and began to take on water. But no one on this sinking ship is even thinking about the lifeboats.
There is no one in the eight FOMC meetings who suggests that the economy faces any serious turbulence ahead. There is not even discussion that a mild recession could be in sight.
That is really scary. These guys didn’t have a clue. They were caught completely by surprise by a housing bubble so obvious that part-time bloggers like me could see it.
In fact, at the last meeting of 2006 (pdf), we hear Janet Yellen, who was then the president of the San Francisco Bank and is now vice-chair of the board of governors, comment that:
“There are some encouraging signs that the demand for housing may be stabilizing … After a precipitous fall, home sales appear to have leveled off … Finally, the gap between housing prices and fundamentals might not be as large as some calculations suggest.”
Needless to say, this wasn’t quite right. Monthly home sales fell by almost 40% over the course of 2007. House prices, which were just edging downward month to month up to that point, would begin to decline far more rapidly. By the end of 2007, there were falling at a rate of almost 2% a month.
The gap between house prices and fundamentals is not as large as some calculations suggest?

Actually, it was exactly as big as calculations would suggest.
In addition to the direct impact that this sort of price decline had on the housing sector, it also implied a loss of almost $400bn a month in housing equity. It was inevitable that a loss of wealth of this magnitude would slow consumption.
The FOMC seemed utterly oblivious to the fact that the savings rate had been driven to record lows by the wealth generated by the housing bubble; and that this consumption boom would end when the housing bubble wealth disappeared. People who no longer had equity in their homes could not borrow to support their consumption.
Furthermore, those who had expected that home equity would support them in retirement would soon discover that they had to cut back in a big way on consumption in order to rebuild their savings.

… Here’s what Frederick Mishkin, a Federal Reserve Board governor who later played a starring role in the movie Inside Job, had to say about the risks from the housing market in that same December 2006 meeting:
“I don’t see any indications that we will have big spillovers to other sectors from weak housing and motor vehicles. In that sense, there’s a slight concern about a little weakness, but the right word is I guess a ‘smidgen,’ not a whole lot.”
… The public may be powerless at the moment to force our political leaders to take the steps necessary to bring the economy back to full employment. However, we certainly have the ability to ridicule the incompetence of those responsible for this preventable disaster. We should take full advantage of the opportunity provided by the latest Fed transcripts. This might not provide the same respite for a scared and suffering nation as movies did in the Great Depression, but it’s a start.
When it comes to ridiculing the federal reserve, I am willing to do my part.

Flipper who bought an REO for nearly 50% off peak purchase price
Today’s featured property is a flip that was bought from the bank. The quick markup and resale looks suspiciously like a flop, but with the new pergraniteel inside, this was more likely a quick cosmetic renovation and a true flip. If they get their asking price, they will probably make $75,000 or more after fees and costs.
Why Falling Home Ownership Is a Good Thing
By Dan Caplinger — January 19, 2012
Ever since the end of the boom years of the early 2000s, the housing market has struggled to hit bottom, seemingly plowing ever lower even after years of declines. As a result, millions of former homeowners have lost their homes, while millions more owe more on their mortgages than their current homes are worth. Many have bemoaned this trend as meaning the end of the American Dream of home ownership.
But when you take away the emotional response to the housing bust, the question remains: Are falling levels of home ownership really such a bad thing? For many, owning a home never made financial sense — and avoiding the burden of having so much debt on your biggest asset can make your financial life a lot easier.
MORE
You really need to read history to understand why banking clans have been chased out of countries. The fractional system itself is a fraud.
The principal is created, but the interest is not. Do people realize that when a buyer sits down at escrow, the amount borrowed from the bank to buy a home is backed by nothing? ie., the bank does not subtract the loaned amount from on its reserves ledger. Signing the note means nothing more than signing over to the bank the right to seize your property, should default ensue.
By going into default, the foreign interests/banks swoop-in and collect all the real property and productive assets, without having any real ‘skin in the game’ other than servicing rights. They can even sell off those very rights to another entity, if they so desire.
How will people react when they discover they’re sitting on worthless paper?
Most people will go on believing the paper has value because the government says it does. “Full faith and credit of the United States” is printed on the paper. It will be interesting to see what the Chinese do when the United States decides to print money to repay them. At some point the Chinese realize they have worthless paper and stop buying it.
I had a case one time where a loan owner tried this theory. He claimed he had never been loaned anything at all so he shouldn’t be obligated to pay anything back. The court booted his claims very early in the process. I asked for sanctions against him but requested that he pay in gold coins since he didn’t think money had actual value……
He appealed to the 9th Circuit and the 9th Circuit just as quickly booted him out of court for his “frivolous” claims.
“I asked for sanctions against him but requested that he pay in gold coins since he didn’t think money had actual value……”
LOL! Classic.
I’m glad to see you stop by. You are always a great addition to the comments.
http://4.bp.blogspot.com/-Y_3ZARNBfmU/TxnuMm5p62I/AAAAAAAABiQ/4D8-omhZVIQ/s1600/global-currency-decline-2001-2011.jpg
How do some of these people in the federal reserve still have their jobs? What do they do which so important that they we can’t live without.
Does anyone actually believe that the Federal Reserve missed the housing bubble? LoL They knew precisely what was going on … they may have misjudged the amount of damage caused.
The Federal Reserve is not part of the govt. They DO NOT share the public interest.
Exactly! The system was conceived/designed and implemented as a wealth extraction apparatus. As a result, going forward, OC servile sheep homedebtor-serfs are facing generations of servitude for negative real returns. Sad really.
It is more comforting to believe they were full of malice and in complete control than full of bullshit and out of control, isn’t it?
It’s not one or the other. Actually, full of malice, not in complete control and full of BS is more like it 😉
IR,
Thanks for posting this. I read clips from some of those transcripts a few days ago and it was depressing. We’ll see, over the next few years, what they were saying when they began to see the full scale of the disaster. I wonder if the future transcripts will contain any hints of panic.
But they weren’t just clueless. I really do believe that Greenspan DELIBERATELY created a housing/spending bubble to get the US out of the 2001-2002 economic slowdown and stock market crash. Krugman at the time wrote that he thought that’s what the Fed would do.
I just don’t think the Fed realized what a monster they had bred. And that monster is still with us, since the debts are still sloshing around the system. I agree with the comment above – in the end they’re just going to monetize a lot of it.
“I agree with the comment above – in the end they’re just going to monetize a lot of it.”
That’s what I think will happen too. We simply can’t afford to pay it off.
Monetization is exactly why it makes sense to borrow at 3.875% (2.5% after tax) to buy real estate. Inflation will simultaneously increase the nominal value of real estate while eroding the real value of the mortgage notes backing it.
Great post. I believe Greenspan and the OMC knew exactly what they were doing. Unfortunately, for everyone involved, the Federal Reserve system is unregulated. It was created by Congress but the judicial, executive and legislative branched have no powers over it, except to abolish it. There’s no oversight whatsoever.
Even if Congress had the power, they do not have the education or knowledge to understand what’s going on.
Are there any examples in modern history where countries have done either of the following:
1. Abolished or massively re-organized their nation’s central banking system?
2. Returned to a gold exchange standard or gold bullion standard?
The answer is probably no, and along with it the likelihood that the US would ever be capable of righting it’s wayward economic ship from crashing against the rocks and sinking over the next 5 to 10 years.
Actually, I believe there is nothing accidental going on with the whole system. Those in control want it to be this way with all the control and resources going to the top and leaving misinformation, misery, poverty, and slavery for the rest so that the cattle can be managed.
There have been numerous people that have warned politicians, corporate executives, and the public of all the bad legislation, so it’s not like they are ignorant. For politicians, their public office is a resume builder with a golden parachute at the end. For the executives, it’s a quick buck. For the pubic, ponzi schemes make for quick bucks.
So to say that it was a lack of knowledge on anyone’s part is dangerous. It is more soothing to believe that it was ignorance or stupidity that was the cause of all the problems. It is more frightening to believe there is a devious master plan. It is also more scary and difficult to purge those responsible for our misery if they are cold, calculating, corrupt, and self interested psychopaths. But that’s what history tells us. Time and again through eons, there has always been a wealthy controlling class and the rest.
It is a system created by the wealthy, for the wealthy, from the wealthy. It is naive to believe anything else. I think a lot of people already understand this and want to be part of the corruption. People want to live on easy street and are willing to sell their souls. People are happy to get on their hands and knees under the rich man’s dinner table and wait for the scraps to be thrown to them. The world is full of zombies. Just look at who the people think their enemy is. It is those that get in the way of their easy money. People are open to the truth. They become belligerent when their true enemy is pointed out.
Think about slavery in the south. What was that all about? Self interest! Why did people vote for Bush TWICE? Self interest! The easy street is possession of valuable resources like oil for themselves. And Bush created the housing bubble. People that played the game voted for him again. What other president would give away free money?
If you look at it closely, who is it a problem for? The rich are doing better than ever. The income distribution gap is widening everyday. Derivatives take priority over all other asset classes.
Previous post should’ve said “People aren’t open to the truth”.
Wow …
Top Justice officials linked to mortgage banks
That’s a scandal we will hear more about.