As top Federal
Reserve officials debated whether there was a housing bubble and
what to do about it, then-Chairman Alan Greenspan argued that dissent
should be kept secret so that the Fed wouldn’t lose control of the
debate to people less well-informed than themselves.
the risk, by laying out the pros and cons of a particular argument,
of inducing people to join in on the debate, and in this regard
it is possible to lose control of a process that only we fully understand,"
Greenspan said, according to the transcripts of a March 2004 meeting.
At the same
meeting, a Federal Reserve bank president from Atlanta, Jack Guynn,
warned that "a number of folks are expressing growing concern
about potential overbuilding and worrisome speculation in the real
estate markets, especially in Florida. Entire condo projects and
upscale residential lots are being pre-sold before any construction,
with buyers freely admitting that they have no intention of occupying
the units or building on the land but rather are counting on ‘flipping’
the properties – selling them quickly at higher prices."
warning been heeded and the housing market cooled, the financial
collapse of 2008 could have been avoided. But his comment was kept
secret until Friday, when the central bank released
the transcripts of Federal Open Market Committee meetings for
2004 and CalculatedRisk spotted
it. The transcripts for 2005 to the present are still secret.
run-up in house prices, which we have followed in Florida and also
see in the populous Northeast and West Coast of the United States,
may be at least partially attributable to unusually low mortgage
rates influenced by our very accommodative policy," Guynn warned.
But when the
Fed released contemporaneous minutes
of the meeting, the bank downplayed Guynn’s concerns.
from some contacts suggested that speculative forces might be boosting
housing demand in some parts of the country, with concomitant effects
on prices, suggesting the possibility that house prices might be
moving into the high end of the range that could be consistent with
fundamentals," reads the minutes, which were released to the
public several weeks after the meeting.
Note the qualifiers
"might be," "suggesting the possibility," "might
be," "could be." In the real world that Guynn described
there is nothing whatsoever "consistent with fundamentals"
that could explain "buyers freely admitting that they have
no intention of occupying the units or building on the land but
rather are counting on ‘flipping’ the properties."
of the transcripts comes at a bad time politically for the Federal
Reserve, as it works to prevent Congress from authorizing the Government
Accountability Office to audit the central bank.
The audit language
has already passed the House, despite White House and Fed opposition,
Senate amendment by Bernie Sanders (I-Vt.) is gaining momentum,
cosponsored as of Monday morning by ten Republicans and five Democrats.
But the Fed
also benefits from the timing. "Transcripts of meetings for
an entire year are released to the public with a five-year lag,"
according the Fed’s own policy. Had the transcripts been released
on time, they could have influenced the confirmation of Ben Bernanke
for a second term as chairman. Meanwhile, the Fed policy of releasing
a full year at once deprives the public of transcripts from the
first four months of 2005, which are now five years old. A Fed spokeswoman
tells HuffPost those transcripts will be available at roughly this
time next year.
At the same
March meeting, Bernanke said that he had reviewed the transparency
policies of foreign central banks and found that other banks were
more forthcoming. "It seems to me that we might want to consider
the possibility of providing the public with some type of regular
financial stability report, perhaps as part of the Monetary Policy
Report to the Congress or in some other existing venue or perhaps
as a stand-alone document," Bernanke suggested. More than five
years later, with Bernanke now chairman, that report has yet to
be made public, though the Fed did create an inter-divisional internal
working group on financial stability.
the passing mention of speculation, the March minutes imply that
the meeting participants had a rosy outlook on the housing bubble.
"Activity in the housing market moderated in January and February
from its elevated pace in the fourth quarter. Single-family housing
starts and permits stepped down, although both measures remained
above their average levels of the first three quarters of 2003,"
the minutes read. "Overall, expenditures were supported by
sizable gains in real disposable personal income and increases in
household wealth owing to rising home and equity prices. … Committee
members noted that activity in the housing sector, while still quite
elevated, had fallen back from its extraordinary pace of late last
But there were
indications from others that housing prices were getting out of
hand. "A second concern is that policy accommodation – and
the expectation that it will persist – is distorting asset prices.
Most of this distortion is deliberate and a desirable effect of
the stance of policy," said Federal Reserve Board Vice Chairman
Don Kohn, meaning that low interest rates were artificially propping
up housing prices. "But as members of the Committee have been
pointing out, it’s hard to escape the suspicion that at least around
the margin some prices and price relationships have gone beyond
an economically justified response to easy policy. House prices
fall into this category."