Transcripts: Fed Failed to See Housing Market Warning Signs

Even though there were indications that the housing bubble was unsustainable, the Federal Reserve made little effort to look into the issues during 2006, according to recently-released transcripts from the Fed’s meetings.

Granted, it is always difficult to foresee major shocks to the system, housing prices in the U.S. had not fallen since 1991, and it certainly seemed like that they would continue to rise indefinitely. Yet, there were warning signs.

According to a Forbes article:

“Heated Congressional hearings had already focused on Fannie Mae and Freddie Mac’s risky lending. The Wall Street Journal warned consistently that Freddie Mac’s risky loans had ‘sent risks soaring, not just for investors but for U.S. taxpayers, who likely would be on the hook if the federally chartered company stumbled.'”

The Fed, the branch charged with overseeing and directing the nation’s money policy, was largely overconfident and uninformed about the looming danger.

For example, as former Federal Reserve President, Alan Greenspan, was finishing his term in the Fed’s January 2006 meeting, officials seemed quite unaware of the true nature of the economy.

Said former San Francisco Fed president Janet Yellen at that meeting as quoted in the LA Times:

“Needless to say, it’s fitting for Chairman Greenspan to leave office with the economy in such solid shape. And if I might torture a simile, I would say, Mr. Chairman, that the situation you’re handing off to your successor is a lot like a tennis racquet with a gigantic sweet spot.”¬†Laughter among the members ensued.

And Timothy Geithner, then-president of the New York Fed and now Treasury Secretary, responded lightly at a March 2006 meeting to concerns about the housing market.

“We believe that, absent some large, negative shock to perceptions about employment and earned income, the effects of the expected cooling in housing prices are going to be modest,” he said.

The transcripts on the whole, show that depending on the federal government to predict oncoming financial disaster has not proven effective.

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on January 16th 2012 in Mortgage News

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