By Zachary A. Goldfarb, Thursday, January 12, 12:38 PM
The leaders of the Federal Reserve went around the room saluting Alan Greenspan during his last major meeting as chairman of the central bank Jan. 31, 2006. Then Timothy F. Geithner, at the time the president of the Federal Reserve Bank of New York and now Treasury secretary, made a prediction.
“I’d like the record to show that I think you’re pretty terrific, too,” Geithner told Greenspan. “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.”
Ben S. Bernanke: “Unlikely revolutionary”: Since he was selected in 2005 to replace Alan Greenspan as chairman of the Federal Reserve, Bernanke has made bold, unprecedented moves in an attempt to bolster the U.S. economy.
Some six years later, Greenspan’s record — sterling when he left the central bank after 18 years — looks much more mixed. Many economists and analysts say a range of Fed policies contributed to the financial crisis and resulting recession. These included keeping interest rates low for an extended period, failing to take action to stem the bubble in housing prices and inadequate oversight of financial firms.
The Thursday release of transcripts of Fed meetings in 2006 shows that top leaders of the Fed — several of whom continue to hold key positions today — had a limited awareness of the gravity of the threat that the weakness in the housing market posed to the rest of the economy. And they had what turned out to be an excessive optimism about how well things would turn out.
In his first meeting as Fed chairman, Ben S. Bernanke noted that the housing market was causing some uncertainty, but that he “was reassured to hear that most participants think that a decline in housing will be cushioned by strong fundamentals in terms of income, jobs, and continuing low interest rates.”
He agreed with that view, saying “strong fundamentals support a relatively soft landing in housing.” He pointed out that residential investment represents just 6 percent of the economy. “I think it would take a very strong decline in the housing market to substantially derail the strong momentum for growth that we are currently seeing in the economy.”
Bernanke made light of the questions surrounding Iceland, which was causing some early waves in financial markets after borrowing heavily.
After a Fed economist gave a presentation that noted those trembles, Bernanke said, “We’d like a full report on the Icelandic,” before he was interrupted by laughter.
Later, the explosion of Iceland’s financial markets led to that country’s banks defaulting on their debts, feeding the financial crisis.
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