The Federal Reserve, Neil Irwin told us earlier in the week, cannot do much for the majority of Americans in a struggling economy. They can only put money in the hands of the well-to-do, in the hopes that they spend more and increase economic growth, which will then trickle down to the masses.

I think there’s more evidence of good monetary policy leading to broadly shared economic benefits, but in this moment, in 2012, that’s mostly right. At least at the direct level, the rich are more affected by bond purchases and interest rate shifts. The time when the Fed could have really helped the mass of society would have been in the housing bubble period, from 2002-2007, by using the consumer protection responsibility it had to stop illegal lending practices, and by discouraging the mortgage frenzy in any and every way possible.

The Fed releases the transcripts of its meetings five years late, so we’re only now finding out about what the Fed thought during that time. In fact, we just got the transcripts from late 2006, almost the height of the bubble. And here’s what they were saying.

As the housing bubble entered its waning hours in 2006, top Federal Reserve officials marveled at the desperate antics of home builders seeking to lure buyers.

The officials laughed about the cars that builders were offering as signing bonuses, and about efforts to make empty homes look occupied. They joked about one builder who said that inventory was “rising through the roof.”

But the officials, meeting every six weeks to discuss the health of the nation’s economy, gave little credence to the possibility that the faltering housing market would weigh on the broader economy, according to transcripts that the Fed released Thursday. Instead they continued to tell one another throughout 2006 that the greatest danger was inflation — the possibility that the economy would grow too fast.

“We think the fundamentals of the expansion going forward still look good,” Timothy F. Geithner, then president of the Federal Reserve Bank of New York, told his colleagues when they gathered in Washington in December 2006.

Some officials, including Susan Bies, a Fed governor, suggested that a housing downturn actually could bolster the economy by redirecting money to other kinds of investments.

And there was general acclaim for Alan Greenspan, who stepped down as chairman at the beginning of the year, for presiding over one of the longest economic expansions in the nation’s history. Mr. Geithner suggested that Mr. Greenspan’s greatness still was not fully appreciated, an opinion now held by a much smaller number of people.

Right, so Geithner doesn’t come off so hot with the effusive praise of Greenspan; maybe he thought at this point that Greenspan could get him his next job. But actually none of them come off well. These are supposed to be the most plugged-in economic policymakers in the country, the best and the brightest. They completely missed a $8 trillion housing bubble that was obvious to anyone going to open houses at that time, watching bidding wars break out in front of them, seeing prices inflate and inflate, having mortgage brokers tell them that “nobody does a fixed-rate mortgage anymore,” etc.

I was one of those people. I thankfully never pulled the trigger on a condo at that time; my life would have taken a much different course. But just by virtue of being mildly immersed in that world, just for a few weeks, I apparently knew more about the unsustainable nature of the housing market than everyone on the Federal Reserve Board of Governors.

They completely missed a catastrophic bubble that had disastrous consequences for the nation. Banks and lenders were making money so they preferred not to see the problems that lie ahead. By 2006 the bubble already showed signs of popping, and still Fed policymakers were tragically ignorant. This is completely embarrassing. Dean Baker, one of the few economists who actually saw the truth at that time, writes:

At this point, the Fed should not have an image that could possibly be tarnished further. If its record had been reported accurately, everyone would be well aware of its incredible incompetence as a manager of the economy.

btw, as noted in the article, many of the people at these Fed meetings are still in top policy making positions. This shows that the U.S. economy still produces good-paying jobs for people without skills.

Can’t add to that.