RAY SUAREZ: As the economy climbs back from one of the country’s deepest recessions, it’s now clear that a dragging housing market remains a pivotal part of the problem.
But, back in 2006, many economists didn’t see big risks in a growing housing bubble or the potential body blow housing could give the economy. Yesterday, we learned the extent of that thinking at the Federal Reserve in 2006, on the cusp of the crisis.
The insights come from newly released transcripts detailing conversations between Federal Reserve Chairman Ben Bernanke and his colleagues at the Fed Board of Governors in 2006. They discuss the changing conditions surrounding an overheated housing market.
But, as Bernanke put it that march: “Strong fundamentals support a relatively soft landing in housing. I think we are unlikely to see growth being derailed by the housing market.”
Binyamin Appelbaum has been reading these documents for The New York Times. And he joins me now.
And we had anything but a soft landing, but we can now see these deliberations, this new transparency. What did you learn about these meetings? What did you learn about the way a Board of Governors meeting works?
BINYAMIN APPELBAUM, The New York Times: I think what was fascinating here, we knew the Fed has missed the crisis, right? We knew they didn’t see it coming. We all lived through that.
But these minutes show us the extent of their misunderstanding of the health of the economy. They show us how badly they misunderstood the way that the economy was working, how badly they misunderestimated the impact of the housing crash.
And it shows, you know, a group of very intelligent, very thoughtful people, you know, talking about the economic situation in the country in a considered way, evaluating what might happen, and having a discussion that, it turns out in retrospect, was far removed from the reality of the actual situation.
RAY SUAREZ: It’s not like they were totally blind. They were seeing steady supplies of intelligence about what was going on in the field.
Here’s a quote from Federal Reserve Gov. Susan Bies. She says: “A lot of private mortgages that had been securitized during the past few years really do have much more risk than the investors have been focusing on.”
But, often, they moved ahead as it they weren’t seeing what they were seeing. Did they ignore the details they were getting?
BINYAMIN APPELBAUM: You know, it’s so striking. If you kept reading from that quote, what you would see is that she went on to say, basically, but this is a small problem. The market as a whole is doing fine. The overall quality of these securities is very good. I’m not worried about the housing market.
In fact, at one point, she said that if there was a mild correction in housing, it would benefit the economy by moving resources to healthier sectors of the economy. You’re right. They saw it. They saw that housing was crashing. They joked about the problems that home builders were having in selling homes. They would tell these stories about home builders giving away cars or dressing up empty properties so they looked occupied.
And they understood that there was a problem in the housing market. What they didn’t understand was how important the housing market had become to the economy as a whole.
RAY SUAREZ: Early in the year, new chairman Ben Bernanke said at a meeting: “So far, we’re seeing, at worst, an orderly decline in the housing market, but there still is, I think, a lot to be seen as to whether the housing market will decline slowly or more quickly.”
Did Ben Bernanke not join in the rah-rah that many of the other governors around the table were indulging in?
BINYAMIN APPELBAUM: This — these transcripts offer a really interesting look at Chairman Bernanke, because what does emerge in that, in the context of that board, he was the person who most frequently said, hey, this could be worse than we think. There is a possibility here that we’re missing some of the consequences that could unfold, some of the damage that could be done to the real economy.
But it was a relative distinction. He did not see the crash coming. He didn’t warn of the consequences that would unfold. You know, he holds the distinction of being, among that group of people, the one most cognizant of the downside possibilities, but it was a group of people who were all unaware of the cracks beneath their feet.
RAY SUAREZ: To be fair, a lot of other economists at the same time were talking about blue skies, soft landing, moderation in the coming years. It wasn’t like there were just a bunch of clods sitting around this table, and everybody else could see it, right?
BINYAMIN APPELBAUM: No, absolutely.
This was a failure to some extent of the economics profession. Most economists, if you put them into this room, would have reached the same conclusions and said the same things. It should always be noted that there were people who were right, who saw this, who warned about it, but they were a minority. Most economists didn’t see it.
But it should also be said that you know, it may be the case that any of us put into center field at Fenway Park wouldn’t play center field very well, but we’re not all the center fielders on the Red Sox. Some people are paid to do this. They’re supposed to be doing it well. That’s the role the Federal Reserve is supposed to be playing, and they didn’t do it.
RAY SUAREZ: This was not only the cusp of the housing crisis. It was also the cusp between the Greenspan era and the Bernanke era.
The old chairman, Alan Greenspan, presides over the first meeting of the year. Now Secretary Tim Geithner, then the head of the Federal Reserve Bank of New York, says into the record: “I would like the record to show that I think you’re pretty terrific, too. And thinking in terms of probability, I think the risk that we decide in the future that you have been even better than we think is higher than the alternative.”
The Greenspan reputation has not matched Geithner’s predictions, has it?
BINYAMIN APPELBAUM: No, there are many fewer people who would probably subscribe to that view at this point.
This was a remarkable send-off for a man who was then regarded as sort of the iconic central banker, the person who had played that role better than maybe anyone else ever had. He had guided the economy through almost two decades of fairly steady growth. People thought the economy was still on an upward trajectory at that point.
And his colleagues praised him to the skies. One called him a Yoda-like figure. Another said that he had left behind for his successor an economy that was like a tennis racket with a giant sweet spot. And they thought he had — they thought he’d been great.
RAY SUAREZ: One aspect of all of all this that is very interesting is the degree to which these professionals missed how enmeshed housing had become in the economy in the widest sense.
Kevin Warsh, a Federal Reserve governor, says in September 2006: “I would say that the capital markets are probably more profitable and more robust at this moment than they have perhaps ever been.”
And they were about to unravel, weren’t they?
BINYAMIN APPELBAUM: That’s a remarkable mistake for him to have made.
This was the governor who was perhaps most closely attuned to Wall Street, the one who watched that part of the economy most closely. He was a former investment banker. And to have been standing there at that moment looking into financial markets, and to have thought that they were more robust than they had ever been, when, in fact, they were about as fragile as they’d ever been, really underscores how deeply the Fed had misunderstood the nature of what it was looking at.
RAY SUAREZ: For all that emerges in these 1,200 pages of transcript, what about the response that these same people around the table launched when it was clear that there were problems? Did they stop the freefall? Did they keep things from getting worse?
BINYAMIN APPELBAUM: Yeah, that’s a very different story, and it’s one that the Fed comes out looking much better in.
I think a lot of economists give them a lot of credit for having intervened decisively, for having moved really strongly to arrest the fall of the economy, to prevent what many people were concerned could become the first real depression in 80 years, to have prevented the collapse of financial markets through a series of unprecedented and massive interventions.
So, this story — you know, we get one year of transcripts at a time. They are released on a five-year lag. So, right now, we’re reading sort of the 2006 installment of this story. Next year, we’ll get 2007, the year after that, 2008. And, frankly, the story starts to look a little bit better for the Fed in terms of how they were handling the economy as it moves forward.
RAY SUAREZ: Binyamin Appelbaum of The New York Times, thanks a lot.
BINYAMIN APPELBAUM: Thank you.