The Masterminds of the Fed Were Caught Asleep

The Federal Reserve of the United States is occupied by an army of economists. About 225 owners of doctorates work for the Fed and have access to a most detailed and often classified statistical database that covers every aspect of the American economy. Their job is the daily analysis of a great amount of evidence; they do that under the lead of Ben Bernanke, the central banker, who is recognized as one of the most important “minds” in the world concerning the monetary policy.

All these “specialized” economists did not manage to realize that the “bursting” of the U.S. economy’s “bubble” of bonds would bring the global financial system a breath away from the precipice and the international economy to the worst recession in the last 80 years. Furthermore, the Federal Reserve’s meeting records from 2006, which have just been made public, show them laughing and joking in front of the most dramatic situation in the U.S. real-estate market, which eventually took down the global economy.

Anybody who studies the Fed knows that it is maybe more mystic than the CIA. The Federal Reserve, which is often judged for its opacity, keeps everything that is said during meetings a grave secret. It publishes nothing but a short summary of the sessions’ records, written in “political language.” Also, the official comments of its members are usually made in an enigmatic language which probably creates more questions than answers.

With the compulsory publication of their records of 2006 (after five years have passed), it is proved that the Fed’s members’ meetings have nothing to do with meetings among serious “academic Titans” that anybody would expect.

Around the big mahogany and granite table, the Fed’s bankers and members of its governing board were making jokes to each other, gossiping on absent people and trying to coax their boss with hilarious flatteries. But, mainly they were exposed irreparably while they seem to laugh in front of the worst economic crisis on the planet since the Great Depression of 1930s.

“We think the fundamentals of the expansion going forward still look good,” Timothy Geithner commented during the session of December 12, 2006; back then, he was the manager of the New York Federal Reserve. But today, as the Secretary of the Treasury, he holds in his hands the luck of the greatest economy on the planet. The danger of “collateral damage” in the economy from the real-estate sector is too small, he used to say.

Even Geithner himself seems to have believed the same fairy tale which “caught asleep” millions of Americans. Real-estate prices had doubled within 10 years; many people seemed to believe as a result that the market would keep on moving upward forever. The developments show the opposite. A year later real-estate prices had fallen at least around 10 percent; this fall was almost 25 percent within two years. A big share of American households’ wealth vanished, and the banks found themselves with toxic titles of hundreds of millions of dollars within their portfolios. The international economy sunk into a great recession. In the United States alone, 8 million jobs have been lost, while the efforts of the governments (internationally) to save the banks planted the seeds of the current debt crisis.

The most important economic minds of the world, the guardians of the global economy, were shown to be unsuspicious concerning the connection between the real-estate market and the financial market. They are shown to have completely ignored the existence of hundreds of billions of dollars in titles which relied on housing loans that would never be paid off. Also, they ignored the way in which those loans would infect the global financial system.

For them, the dramatic bursting of the economic bubble in the real-estate market was a bit funny. Most of them were laughing when the manager of the Atlanta Fed was discussing the constructors’ agony while finding buyers for the thousands of the unsold newly-built residencies, with some of them giving a car as a present with every house.

Geithner Bows in Front of Greenspan’s Authority

The specialists who were supposed to be responsible with the work of protecting the global economy were caught asleep before the worst crisis since 1929. The reason is revealed within the records of the January 31, 2006 meeting, which was the last under Greenspan’s presidency after almost 20 years. None of the participants had the will to doubt the central banker’s authority, who back then was called the “magician” or “maestro” of the global economy.

“I’d like the record to show that I think you’re pretty terrific, too. And thinking in terms of probabilities, I think the risk that we decide in the future that you’re even better than we think is higher than the alternative,” Tim Geithner stressed. Today, everybody knows how wrong he was. Greenspan’s myth was demolished when people realized that it was his formula which demanded low compound interests, derangement of the markets and minimum state intervention in economy, which caused the crisis that has lasted until today.