Counterparties: Federal Officially Muddled Committee
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The full transcripts of the Fed’s 2007 Open Market Committee meetings are out! To financial nerds, this is a bit like opening Christmas gifts from five years ago: some things look quaint and misguided, others seem ahead of their time.
There’s no shortage of embarrassing nuggets in the Fed’s early discussions of the financial crisis. In a March meeting, Ben Bernanke believed the housing market would stay strong; even in December, he said “I do not expect insolvency or near insolvency among any major financial institution”. There’s also cattiness: Richmond Fed President Jeffrey Lacker, as Neil Irwin pointed out, appears to accuse then New York Fed president Tim Geithner of leaking information to Bank of America’s CEO.
The transcripts also reveal a very polite, measured group of singing canaries. Binyamin Appelbaum writes that in August that the Fed “began its long transformation from somnolence to activism”, eventually cutting rates and expanding the use of the discount window. To Cardiff Garcia, if there’s a “winner” of the FOMC’s transcripts it’s Janet Yellen. In September, Yellen warned of “utter devastation” in the private equity and mortgage markets, and “severe illiquidity” in the secondary markets for mortgages, securitized products and some interbank loans. A month later, Randall Kroszner was warning of a wave of mortgage rate resets. By December, Geithner was worrying about a “deep and protracted recession”, Eric Rosengren was fretting about derivatives, and Bernanke was sure that the crisis would eventually hit Wall Street (though several members of the Fed didn’t seem to agree).
There are two larger stories here: just how long it took the Fed to catch on to what would turn out to be the biggest financial downturn since the Great Depression — though it appears Jim Cramer’s August 2007 rant about the Fed’s lack of action was basically right. It’s also about the Fed’s puzzling over — and sometimes lacking — crucial economic data. In December, Kroszner complained about the lack of good data on the mortgage market and called for “hiring people who can analyse these things”:
Something that was disheartening to me is that the Mortgage Bankers Association said that they hope by early next year to be able to provide sufficient information to the market so that people can really assess on a loan-by-loan basis what’s in their CDOs, and that’s a real concern. The information is simply not out there. So it’s not just confidence or concerns. People are now looking carefully and saying, ‘I just don’t have the information to be able to make an assessment.’
– Ryan McCarthy
On to today’s links: