Here are two pieces of evidence that macro economists are useless. The first is an accounting of the 2006 meeting of the Federal Reserve that appears in today's Los Angeles Times. The second is an excerpt for The Great Recession Conspiracy, written in 2008, describing the same period of time. Make up your own mind.
Federal Reserve missed signs as crisis loomed
Transcripts of 2006 policymaker meetings illustrate a glaring absence of alarm.By Don Lee, Los Angeles Times
11:24 PM PST, January 12, 2012
Reporting from Washington
Running his first meeting as chairman of the central bank, Ben S. Bernanke, in his collegial style, solicited observations about the economy from colleagues. Some of the Fed's staff earlier had talked about the potential risks, but in that meeting and in subsequent ones that year, there was a glaring absence of alarm about the dangers of the housing bubble and what might lie ahead for the broader economy.
Instead, concerns about a housing bust were largely dismissed by most officials, according to meeting transcripts released Thursday.
"We believe that, absent some large, negative shock to perceptions about employment and earned income, the effects of the expected cooling in housing prices are going to be modest," said Timothy F. Geithner, the current Treasury secretary, who then was president of the Federal Reserve Bank of New York.
When Geithner was finished, Bernanke asked, to a round of laughter, "Anything to report on co-op prices in Manhattan?"
"As in many cases, I am not sure what you can take from the anecdote, but I guess some people say that you see a little of the froth dissipating," Geithner replied. "But I don't think the adjustment is acute.
"If you see hiring at the New York Fed go up substantially in the market, that will be a good leading indicator of housing prices reverting somewhat," he said, prompting more laughter.
Bernanke, now in his second term as Fed chairman, as well as some other policymakers previously have acknowledged the central bank's failure in picking up warning signals of a housing market hurtling toward disaster.
But the transcripts of the Federal Open Market Committee's 2006 meetings, released with the usual five-year time lag, reveal in painfully embarrassing detail the high degree of overconfidence and lack of foresight just ahead of the real estate collapse and financial crisis that engulfed the nation.
That March meeting was the second of the year for Fed policymakers. The one preceding it, in January, was punctuated by accolades for departing Chairman Alan Greenspan, whose once-giant stature has since been diminished by criticisms that the Fed, under his stewardship, helped create the excesses in housing by keeping interest rates too low for too long and failing to protect consumers from predatory lenders.
"Needless to say, it's fitting for Chairman Greenspan to leave office with the economy in such solid shape," said Janet Yellen, at the time the president of the San Francisco Fed and now the Fed's vice chair.
"And if I might torture a simile, I would say, Mr. Chairman, that the situation you're handing off to your successor is a lot like a tennis racquet with a gigantic sweet spot," she added as laughter broke out.
Roger Ferguson, then Fed vice chairman, described Greenspan at that January meeting as "the monetary policy Yoda," referring to the elfin guru in the movie "Star Wars."
The release of such fawning remarks, as well as light-hearted talk and jokes preceding America's worst economic crisis since the Great Depression, is certain to further tarnish the image of the Federal Reserve.
Since the recession and federal bailout of financial institutions, engineered by the Fed and the Treasury, Bernanke has been on the defensive as many in the public and in Congress have lashed out at the Fed for its failures.
In the last three years, Bernanke has sought to build up the Fed's reputation through greater transparency, and he has been lauded by many economists for taking aggressive and successful steps to help pull the country out of recession.
Fed officials weren't commenting Thursday on the 2006 transcripts.
"The transcripts doubtless will be used to question the central bank's credibility," said Ryan Sweet, an economist at Moody's Analytics who watches the Fed. But in a note to clients, he said policymakers had a defense: "The economy was growing near its potential rate in 2006.... Shocks are by definition difficult to predict."
Before we leave the discussion of how we got into this recession, it is worth noting that there were people shouting out warnings well in advance of the crash.
Warren Buffett, the Sage of Omaha, is famous for calling Credit Swaps, “Time bombs, both for the parties dealing in them and economic system.” And “Financial weapons of mass destruction”.
Brooksley Born was Chairman of the Commodity Futures Trading Commission from 1996 to 1999. She understood the danger of unregulated credit derivative swaps and lobbying widely for regulation. Her attempts of achieve that regulation were thwarted repeatedly by Robert Rubin, Larry Summers, and Alan Greenspan, among others.
Private citizens like Gerard Jackson, the Brookesnews Economics Editor, said Alan Greenspan was “…once again laying the foundation for another recession, “six years ago.
It wasn’t just Americans who foresaw the upcoming problems. Riad Toufic Salame is the governor of the Lebanon’s central bank, the equivalent of our Federal Reserve Bank. In spite of extreme pressure from Lebanon’s business community and the government, he barred any bank in Lebanon from investing in mortgage backed securities. Incidentally, 2008 was the best year ever for Lebanon’s Bankers.
As early as 2004, Chris Swecker, the FBI agent in charge of criminal investigations, warned repeatedly of fraud running rampant in the home mortgage business.
Felix Rohatyn, the financier who saved New York City from bankruptcy in the 1970’s, called the “innovations” that caused this recession, “financial hydrogen bombs , built on personal computers by 26 year old M.B.A.s”.
Bill Gross, Chairman of Pimco, a huge investment management service, issued warnings on the company website and in its regular client letter for more than two full years before the implosion began.
Unfortunately, nobody much paid any attention.