Excerpt
RAY SUAREZ (Newshour): 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.
Signification excerpts
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, The New York Times: 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.
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BINYAMIN APPELBAUM: 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.
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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.
Early on, talk about the-blind-leading-the-blind.
IMO what they missed early on was just how risky Sub-Prime Loans AND the bundling of these loans into "securities" was.
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