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Yesterday Ryan Grim reported on the Huffinton Post how Greenspan was able to keep dissent inside the Fed (about whether a housing bubble existed), a secret from the public.

Greenspan Wanted Housing-Bubble Dissent Kept Secret

"We run 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.

Badabing also wrote a Rec listed diary about this yesterday: Alan Greenspan 'Economic Dictator' No One Is Allowed to Debate

I wondered what would the rest of the Fed's transcripts from the 2004 meetings reveal?

So I dug though all the Fed's pdf files from 2004 and here's what I found.

For 8 months following that March meeting the housing bubble continued to be a concern in the Fed's meetings, but Greenspan continued to hide the Fed's discord over the health of the housing market from the public.

At the November Open Market meeting alternate member Stern from the Federal Reserve Bank of Minneapolis reported on a meeting he had with representatives of the mortgage and real estate industry.

Nov. 10th 2004 Open Market Committee Transcript pdf file


pages 48-49
A little over a week ago, we hosted at the Bank a meeting on housing and residential construction activity.  There were several reasons for this.  One, of course, was the fact that we hear periodic discussions of a potential bubble in house prices.  But second, I’ve been struck, as I’ve watched developments in the Twin Cities and as I’ve traveled around other cities in the last several years, by the absolutely high level of construction activity that seems to be occurring.  It’s not only new building, but conversions of all sorts of warehouses, schools, and former office buildings to residential property.  A change in mix seems to be occurring as well, with more of the construction
and renovation yielding townhouses and condominiums rather than the standard single-family home.

I thought it would be a good idea to try to get some other people’s perspective on this, so we had at the meeting a group of developers, lenders, consultants, and economists. They brought a national perspective, although they did have special expertise in the Twin Cities market and a few other particular markets across the country.  In general, I would say that their comments were positive and largely unsurprising.  There was little overall concern about a bubble in house prices and little anticipation of a major correction in house prices in the near term. There was, however, fairly widespread agreement that the pace of increase was likely to slow going forward.

Let me just note three specific issues that came up because I, at least, found them of interest. The first, which it won’t surprise this group to hear, is that they attributed a good deal of the strength in housing to very favorable financial conditions.  In this regard they talked not only about low interest rates but also lower down-payment requirements.  I might add that a couple of the lenders did say that they thought the credit pendulum had swung too far.  They felt that credit conditions had become too easy, and they were anticipating some potential difficulties going forward—presumably in somebody else’s shop!  [Laughter]  Second, they reported that at least in some markets a significant percentage of the purchases of new units were by investors, where the term "investors" means people who don’t intend to occupy the property, at least not immediately.  As best they could judge, in some markets investors were buying up to 30 percent of the new additions to supply. And finally, they noted that there seemed to be some acceleration of purchases by first-time homebuyers who were concerned that they were going to be priced out of the market if they waited longer.  The implications of that, of course, are that at some point such sales will slow because people will have acted if they could.  So that’s a summary of that meeting.

The Red Flags

(1) the Fed's low interest rates were fueling the hot housing market

(2) speculators were rushing into the housing market driving prices even higher

(3) buyers felt rushed to close deals because prices were escalating so rapidly

All three of these danger signs were dismissed by Stern, Greenspan and most other members of the Fed who seemed to give the industry insiders opinions more weight. In reading the transcripts I couldn't help but notice how the members of the Fed kept mentioning their many contacts with CEOs. The members of the Fed inhabit the same insular world CEOs do, and the are surrounded be the self serving views of CEO's.

The three points Mr. Stern took away from his meeting with industry insiders got lost in the spin when the heavily edited minutes were released to the public in December 2004:

Minutes  (Released December 16, 2004)

Housing activity increased further in August. Housing starts for new single-family homes bounced up in July and remained about unchanged in August, and starts of multi-family homes rose somewhat each month. Taken together, total housing starts in August reached the highest level in five months. Home sales remained robust in July for both existing and new homes, although sales were below the monthly peaks recorded earlier in the year. Interest rates on thirty-year conventional mortgages receded over the past couple of months, retracing much of the runup in rates that occurred earlier in the year. Weekly data on mortgage applications to purchase homes continued to move up, on average, through mid-September.

During the Fed next Open Market Committee meeting in December 2005 the Housing Bubble came up again when Jack Guynn who brought the issue up in March, raised the issue again.

Dec. 14th 2004 Open Market Committee Full Transcript pdf file


page 29
Finally, the substantial 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, which has been in place for some time.  Those developments and the risks associated with the run-up in house prices probably deserve further study and thought as we decide how to posture policy.  

For the first time in the 8 months the housing bubble had been under discussion in the Fed's closed meetings the minutes released to the public in January of 2005 included a brief mention of the Fed's dissenters' concerns. Even if the Fed did follow through with a study of the run-up in house prices after that December 2004 meeting, the Fed didn't make any moves to dampen the housing bubble during 2005.

Minutes (Released January 4, 2005)

Some participants believed that the prolonged period of policy accommodation had generated a significant degree of liquidity that might be contributing to signs of potentially excessive risk-taking in financial markets evidenced by quite narrow credit spreads, a pickup in initial public offerings, an upturn in mergers and acquisition activity, and anecdotal reports that speculative demands were becoming apparent in the markets for single-family homes and condominiums.

Greenspan's doctrinaire reliance on markets to be self correcting and self regulating would prove disastrous for the country's economy, as he continued to dismiss the gathering storm clouds. The undeserved reverence that many accorded Greenspan, regarding him as sort infallible economic oracle, put him up on a pedestal above criticism. Greenspan used his unique status to suppress dissent, and make sure that his free market fundamentalism dominated every aspect of the Fed's decision making.

Unfortunately we'll have to wait another year to read what transpired in the Fed's Meetings during 2005. Five years is too long to wait in order to see what the Fed's was up to.

Originally posted to Lefty Coaster on Tue May 04, 2010 at 09:03 AM PDT.

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Comment Preferences

  •  The Fed's ivory tower needs more sunlight (17+ / 0-)


    "These old Wall Street boys are putting up an awful fight to keep the government from putting a cop on their corner." - Will Rogers

    by Lefty Coaster on Tue May 04, 2010 at 09:03:40 AM PDT

  •  It's hard to imagine the chair of the Fed (3+ / 0-)

    adopting "market fundamentalism," when the real market fundamentalists would be out attacking the Federal Reserve Bank for even existing in the first place.  

    "Don't bother me with facts -- my mind is made up." -- Foghorn Leghorn

    by Cassiodorus on Tue May 04, 2010 at 09:13:45 AM PDT

  •  In Puget Sound Spotters Were Driving Around (5+ / 0-)

    working for international investors, said our real estate agent, pouncing on every property that came on the market.

    In 3 cases when we called about houses the day they were first listed, there were multiple offers and backups already in place.

    We are called to speak for the weak, for the voiceless, for victims of our nation and for those it calls enemy.... --ML King "Beyond Vietnam"

    by Gooserock on Tue May 04, 2010 at 09:22:00 AM PDT

  •  Whatever we do, let's not audit them. (5+ / 0-)

    People like us just wouldn't understand what they are doing.

    "Capitalism is irresponsibility organized into a system." -- Emil Brunner

    by goinsouth on Tue May 04, 2010 at 09:34:39 AM PDT

  •  I don' t know when he said it, but (8+ / 0-)

    I distinctly remember Greenspan explaining that the reason the capital gains tax on homes needed to be reduced or eliminated was because the equity people had accumulated in their homes needed to be "liberated" for the market--i.e. people needed to be persuaded to sell their already paid-for houses and encouraged to buy-up.  This would, of course, also boost the market in home furnishings, appliances and other major expenditures.  Never mind that if people could spend their equity, the pressure on increasing wages would be less.
    The transfer of wealth to the upper one percent was not a happenstance.

    The most benign interpretation of what has happened is that economists pushed to monetize all transactions in order to be able to account for them and make their models of the economy a more accurate representation of the reality.  Counting became an end in itself.  But, ultimately, it was in the interest of exercising control over how people sustain themselves in the interest of using economic forces to manipulate the population -- i.e. advance the political economy, trade and exchange that's aimed not at sustenance, but at rule and regulation.  You might say "form over substance."

    by hannah on Tue May 04, 2010 at 09:48:58 AM PDT

    •  I believe it was Lereah (3+ / 0-)
      Recommended by:
      lcrp, thethinveil, Deep Texan

      who ridiculed not spending equity, comparing it to hoarding money in a mattress.  Thus the phenomenon of people who bought a house, lived in it for thirty years, and now carry a mortgage four or five times greater than the original purchase price.  Maybe someday we'll learn not to take advice from somebody trying to sell us something.

      I think Greenspan et al. knew full well what was occurring.  But if they didn't, these minutes reveal, among other things, the extent to which our economic policymakers were isolated from the broader society under their purview.  Any Fed member watching cable television or reading an airline in-flight magazine for fifteen minutes would have realized that a mania was well underway.

      A terrible beauty is born. --W.B. Yeats

      by eightlivesleft on Tue May 04, 2010 at 10:07:10 AM PDT

      [ Parent ]

      •  There's an advantage to the scoundrel (1+ / 0-)
        Recommended by:
        Lefty Coaster

        in dealing with the instinct-driven in that their inability to recognize deception makes them not only easy to deceive but to blame for their misunderstanding.  

        "Buyer beware" and "there's a sucker born every minute" are both short-hand for the position that, if people are stupid enough to believe lies, they deserve to be deceived.

        That's been Satan's line ever since the garden of Eden.  Which makes the gnomes of Wall Street are nothing more than Satan's minions.

        That's not, btw, an immoral position.  Immoral means not moral.  Deception is not not moral; it's destructive.  There's a difference between not supporting and tearing down or causing ruination.

        by hannah on Wed May 05, 2010 at 04:26:08 AM PDT

        [ Parent ]

      •  What happened is that they substituted (0+ / 0-)

        the symbol (money) for the act (ownership or equity).  It's as if somebody took control of the letters of the alphabet and decided who could use them to write, thereby rendering the majority of the population unable to communicate by sight--i.e. practically blind.

        by hannah on Wed May 05, 2010 at 04:31:11 AM PDT

        [ Parent ]

    •  Residential Capital Gains was camel's nose under (3+ / 0-)
      Recommended by:
      hannah, thethinveil, Deep Texan

      the tent being used for PR to make the case for slashing Capital Gains taxes on the super wealthy. The super wealthy got their preferential tax rates on
      Capital Gains. Bush slashed these tax rates but it was Clinton who gave the super rich their biggest cuts in those rates.

      "These old Wall Street boys are putting up an awful fight to keep the government from putting a cop on their corner." - Will Rogers

      by Lefty Coaster on Tue May 04, 2010 at 10:08:42 AM PDT

      [ Parent ]

      •  In all cases, the legislation was developed (0+ / 0-)

        and passed by Congress.  The President's signature does not make it his edict.  At best, it is an expression of assent that the legislation is good policy and do-able.  At worst, it is vetoed.  Bush/Cheney opted for an intermediate response -- a signature with a signing statement to negate the endorsement.  The latter is consistent with the belief that if negative actions are announced (somewhat like a surgeon telling a patient he's about to cut off the wrong leg), no blame attaches to the result.  
        In other words, if a person agrees to abuse or fails to object strongly enough, then he's got only himself to blame for the abuse.

        Perhaps we should call it the "no soup for you" defense in which "if you don't follow orders, you'll get no soup" is a quaint version of

        "Obedience to the law is freedom"

        another way of saying "those who don't do what they're told will starve"--

        subordination being enforced by the threat of starvation.

        by hannah on Wed May 05, 2010 at 04:15:01 AM PDT

        [ Parent ]

        •  It was Bill Clinton who Bullshitted us (0+ / 0-)

          when he said ""if you work hard and play by the rules, you ought to have a decent life and a chance for your children to have a better one." and then turned around and tilted the tax system to heavily favor the super wealthy.

          Do I fault Clinton? You bet I do!

          "These old Wall Street boys are putting up an awful fight to keep the government from putting a cop on their corner." - Will Rogers

          by Lefty Coaster on Wed May 05, 2010 at 01:26:34 PM PDT

          [ Parent ]

          •  The assertion of a principle does not (0+ / 0-)

            come with a guarantee of commitment to that principle.  The electorate is frequently led to erroneous conclusions by word games.  It's what the authoritarians in our midst have been skillfully using for forty years.  
            Had we known then what we know now, we would have recognized that Clinton/Bush was a "six of one, half dozen of the other" situation, since both were bankrolled by the Arkansas "bankers" and their friends in the financial industry.

            The transfer of public assets into private wealth under cover of law has been going on in North America since the first Europeans landed.  What's happened recently, perhaps because the natural resources are getting depleted, is that the accumulation of money has become a shield behind which deprivation can be carried out with less notice, even though the flow of information is greater.
            When the system is organized to produce private profit at public cost, the asset transfer occurs automatically.  When the country club class gets a "cut" of every public dollar spent via a trickle of interest from bonds and such, then those who control the flow of money get to accumulate wealth without doing anything at all.  Which would not be particularly detrimental, if they didn't sequester the money and play with it amongst themselves, thereby depriving the economy of its necessary lubricant.


            by hannah on Thu May 06, 2010 at 01:43:01 AM PDT

            [ Parent ]

  •  the markets are self correcting now, big time (2+ / 0-)
    Recommended by:
    Lefty Coaster, Deep Texan

    see what a brilliant man Greenspan is. untouchable. not so much on the self-regulating of the market though.

    Major Free Market Fail.

    Anyone who isn't confused doesn't really understand the situation. Edward R. Murrow

    by lexalou on Tue May 04, 2010 at 09:55:04 AM PDT

  •  Greenspan lost the distinction (2+ / 0-)
    Recommended by:
    lcrp, Lefty Coaster

    between real wealth, i.e. sustainable/deserved prices based on actual capital and labor invested, and fake wealth, i.e. bubble prices based on markets running off.

    Bubbles ultimate operate on the Greater Fool theory.  Greenspan turned out to be proof of it.

  •  I knew that were problems in early 2005 (1+ / 0-)
    Recommended by:

    Back in the early 2000s, in places like Florida, people would line up to buy condos in buildings where the developers had not even broken ground. I remember buildings being completely sold out before the developers even finished construction. I think that some of these units sold several time before they were even finished. I knew that the demand was unsustainable.

    In the DC area, where I live, I also spotted problems in 2005-2006. Back then properties that used to sell the day they appeared on the markets now were taking a day or two. Then, at some point, that day or two because a week. That week soon turned into a month. Then the month turned into months. That's when I knew that the boom was unsustainable.

    What seems to have happened is that all the craziness moved to real estate. Once the bubble blew up the money went into real estate. And then, like the bubble, real estate overheated and crashed.

  •  Here's the problem (1+ / 0-)
    Recommended by:
    Virginia mom

    By 2004/5 the bubble was already nearly fully inflated.  Also remember that we were just beginning to come out of a jobless recovery and any interest rate actions by the Fed would have likely caused a slip back towards recession at the time.  Finally, let's not forget that Congress/various administrations are equally to blame here, as the push for home ownership had been sacrosanct and we encourage it through damaging tax policies like mortgage interest and property tax deductions on taxes.  To blame the Fed for the housing bubble is very short-sighted and scapegoating.

    •  Not ture (2+ / 0-)
      Recommended by:
      Virginia mom, thethinveil

      No one person bears more responsibility for the Great Recession than Alan Greenspan.

      "These old Wall Street boys are putting up an awful fight to keep the government from putting a cop on their corner." - Will Rogers

      by Lefty Coaster on Tue May 04, 2010 at 11:45:38 AM PDT

      [ Parent ]

      •  I disagree (0+ / 0-)

        One could argue that the parties responsible for passing CFMA and FSMA are much more culpable.  Without those two pieces of legislation we could not have had this crisis.  

        •  Greenspan was derelict in his regulatory duties (1+ / 0-)
          Recommended by:

          due to his ideological biases. Had someone more pragmatic than a rigid ideologue like Greenspan controlled the levers of financial power available to a Chairman of the Federal Reserve, the financial abuses that led to the Great Recession probably could have been mitigated to a large extent, or avoided completely.    

          "These old Wall Street boys are putting up an awful fight to keep the government from putting a cop on their corner." - Will Rogers

          by Lefty Coaster on Tue May 04, 2010 at 12:30:47 PM PDT

          [ Parent ]

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