Economists are idiots . . . or maybe just self deluded

by David Safier

If you want to know how wrong economists can be, read the entire NY Times article about the Federal Reserve meetings in 2006. Transcripts of the meetings were just released.

The housing bubble? Oh, they saw it, but they were sure it wasn't a problem.

The general consensus on the board, summarized by Mr. Geithner, was that problems in the housing market had few broader ramifications. “We just don’t see troubling signs yet of collateral damage, and we are not expecting much,” he said at the September [2006] meeting.

Mr. Bernanke initially agreed, telling colleagues at his first meeting as chairman, in March, “I think we are unlikely to see growth being derailed by the housing market.”

In fact, they were convinced, less money in housing would divert more money to the rest of the economy.

“I really believe that the drop in housing is actually on net going to make liquidity available for other sectors rather than being a drain going forward, and that will also get the growth rate more positive,” Ms. Bies told colleagues at the committee’s June meeting. Ms. Bies could not be reached for comment Thursday.

And all those new fangled accounting tricks of splitting up mortgages, packaging and selling them? They were sure, that was a great way to prevent economic repercussions.

One fundamental reason for this blindness was that Fed officials did not understand how deeply intertwined the housing sector and financial markets had become. They also were convinced that financial innovations, by distributing the risk of losses more broadly, had increased the strength and resilience of the system as a whole.

Alan Greenspan? Either a great Fed chair, or the Greatest Fed Chair Of All Time.

For the Fed 2006 began with the departure of Mr. Greenspan, who presided in January over his final meeting as Fed chairman and was then widely regarded as the epitome of a central banker, a master who had guided the American economy through almost 20 years of remarkably consistent growth.

“I’d like the record to show that I think you’re pretty terrific, too,” Mr. Geithner said in adding his voice to the chorus of tributes at that final meeting. “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.”

Ms. Yellen said: “It’s fitting for Chairman Greenspan to leave office with the economy in such solid shape. The situation you’re handing off to your successor is a lot like a tennis racquet with a gigantic sweet spot.”

I don't want to paint all economists with the same brush. By 2006, Paul Krugman had already been warning about the dangers of the housing bubble for years. So had some crazy, left wing, hippie economists. But the very rich "grownups," patting each other on the backs in the Fed meeting rooms, scoffed at the nay sayers. Things were just getting better and better and better.