We Are Still Paying For Bernanke’s Biggest Goof

13178_benbernanke_square We Are Still Paying For Bernanke's Biggest Goof BLOG VIEW: Question: How many Federal Reserve leaders does it take to screw in a light bulb? Answer: After reading the transcripts of an August 2007 Fed meeting where the central bankers believed that the subprime mortgage meltdown would have little impact on the U.S. economy, I wouldn't trust any Fed official to install a light bulb.

It is no secret that Fed Chairman Ben Bernanke was utterly clueless when it came to recognizing the warning signs that contributed to the 2008 economic crash. In March 2007, he responded to a question about the deflating housing bubble with the benign observation that the ‘impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained.’

However, the transcripts of the Aug. 7, 2007, meeting of the Federal Open Market Committee – which was made public for the first time on Jan. 18 – is nothing less than astonishing. Even though Bernanke was cognizant that his initial belief of a ‘contained’ subprime market meltdown was too optimistic, he utterly failed to recognize that the economy was speeding in the wrong direction.

‘The odds are that the market will stabilize,’ Bernanke said during the meeting. ‘This restrictive effect could come in various magnitudes. It could be moderate, or it could be more severe, and we are just going to have to monitor how it adjusts over time.’

Bernanke was not alone in his unrealistic approach to the economy.

‘Well-capitalized banks and opportunistic investors will come in and fill the gap, restoring credit flows to nonfinancial businesses and to the vast majority of households that can service their debts,’ said Donald Kohn, then-vice chairman of the Fed.

And Dallas Fed President Richard Fisher was even more irrationally exuberant, pointing to a MasterCard Inc. report on increased consumer spending and news that Anheuser-Busch was raising the price of Budweiser beer by 3% as evidence that a ‘risk of recession has become much slimmer.’

There were a few sane voices raised during that bizarre meeting. Two regional Fed chiefs – San Francisco's Janet Yellen and New York's William Dudley – and Fed Governor Kevin Warsh were openly agitated over the resonance created by the subprime fiasco. Another regional Fed leader, New York's Timothy Geithner, did not go on the record to share their apprehension, though he clearly suspected that the Fed could not remain blissfully ignorant for too much longer. During a follow-up Fed meeting held via videoconferencing on Aug. 16, 2007, Geithner was accused by Richmond Fed chief Jeffrey Lacker of secretly informing a few major banks that the Fed was planning a rate cut. Geithner insisted that he did not leak the information to the banks.

In retrospect, Bernanke and his Fed gang were not alone in refusing to acknowledge that the economy was collapsing. The George W. Bush administration was equally adamant in its insistence that the economy was still vibrant, and even Doug Duncan, then-chief economist of the Mortgage Bankers Association, cheerfully saw the problems as isolated to a few markets.

Still, the central bank is supposed to be above the levels of happy spin associated with politics and business leadership. The inability of Bernanke and most of the Fed leaders to recognize the dawning of the economic crash was one of the most incompetent failures in the central bank's past century.

Of course, the Fed's obvious lack of success in reanimating the economy via countless quantitative easing endeavors seems to confirm that the wrong people have their hands on the economic steering wheel. But why should we think that they could fix the problem when they were unable to see the disaster forming right before their eyes?

– Phil Hall, editor, MortgageOrb

(Please address all comments regarding this opinion column to hallp@mortgageorb.com.)


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