Transcripts released by the Federal Reserve reveal the central bank misinterpreted the downswing in the housing market as a positive signal of the market pricing in risk rather than the beginning of a bust that would quickly unravel the financial markets.
From the Financial Times:
Top officials at the US Federal Reserve took months to realize the 2007 financial crisis would rock the world’s largest economy, according to an embarrassing set of meeting transcripts released on Friday.
The transcripts reveal that some Fed policy makers even viewed the crisis, which erupted in August 2007 on the back of problems in the market for subprime mortgage loans, as good news because markets were pricing in more risk.
Frederic Mishkin, featured prominently in the documentary Inside Job, was particularly bullish on the downturn in the housing market.
“The point of the subprime market is just that we now trust the credit-rating agencies less. Basically what I think is happening in a way is quite a good thing: We were concerned that the markets were a little too optimistic, that there was too much opacity, and that people weren’t worried about it,” Mr Mishkin said. “Now, in fact, they are worried about it, and I think that is fundamentally a healthy situation.”
Both Geithner, then President of the New York Fed, and Chairman Bernanke played down the severity of the problems in the market as well as dismissing the need for bailouts. Bernanke even said at one meeting “It’s a question of market functioning, not a question of bailing anyone out.”
If the Federal Reserve, designed for and by Wall Street, is so poor at catching these bubbles why is it so important that it be “independent” from democratic control?
Image by SS&SS under Creative Commons license.