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.
"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.
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:
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.
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.
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.