NYT: Inside the Fed in 2006: A Coming Crisis, and Banter

[SnyderShrugged]

No way! The geniuses that run our economy were clueless? Tell me it isnt so!

so the remaining question is..."Do you STILL trust them?"

http://www.nytimes.com/2012/01/13/business/transcripts-show-an-unfazed-fed-in-2006.html?_r=1

just some blurbs...

The transcripts of the 2006 meetings, released after a standard five-year delay, clearly show some of the nation’s pre-eminent economic minds did not fully understand the basic mechanics of the economy that they were charged with shepherding. The problem was not a lack of information; it was a lack of comprehension, born in part of their deep confidence in economic forecasting models that turned out to be broken.

“It’s embarrassing for the Fed,” said Justin Wolfers, an economics professor at the University of Pennsylvania. “You see an awareness that the housing market is starting to crumble, and you see a lack of awareness of the connection between the housing market and financial markets.”

“It’s also embarrassing for economics,” he continued. “My strong guess is that if we had a transcript of any other economist, there would be at least as much fodder.”

more at link

[SkinsHokieFan]

Nothing to see here, the fed is fine, even though posters in the tailgate on ES were worried about a recession once the housing bubble popped as early as 2005

[DjTj]

They are human, and thus fallible.

I trust that their concerns are generally aligned with those of country as a whole. The article shows that they were at least aware of the housing slowdown, and they were thinking about how it might affect the broader economy. They were just wrong about it.

Except Bernanke, interestingly.

”I don’t have quite as much confidence as some people around the table that there will be no spillover effect,” he said.

Nobody knew how deeply Wall Street was invested in the housing market. The banks themselves (which are filled with very smart people all trying to make money) did not realize the extent of the risks they were taking.

The Fed has done a decent job of keeping us afloat in the wake of the crisis. (At least we're doing better than Europe). It would be nice if they were psychics, but they're only human, and we can't expect them to save us from ourselves all the time.

[CurseReversed]

As if that was not enough reason not to trust them, turns out they were secretly already handing out trillions of dollars before many of the bailouts were even passed.

This does not seem to even be big news. Apparently, trillions mean little to us anymore. We, seemingly, just have to trust these financial institutions, with their funny money, and their secrecy, and hope that somehow all their actions are for our benefit, just not our understanding.

http://www.dailypaul.com/188540/audit-teh-federal-reserve-reveals-16-trillion-in-secret-bailouts

[SnyderShrugged]

It would be nice if they were psychics, but they're only human, and we can't expect them to save us from ourselves all the time.

So the ones who DID know are psychics according to this logic, thus should be listened to more closely

[CurseReversed]

They are human, and thus fallible.

And thus should not be endowed with the power to create unlimited amounts of, what is considered the primary source of wealth on earth, in relative secrecy.

Which human could you possibly trust with this power?

[Popeman38]

The fact that Timothy Geithner is now Treasury Sec is appalling.

[JimboDaMan]

So the ones who DID know are psychics according to this logic, thus should be listened to more closely

If they were always right. But usually the guy who was most right last year is not the guy who's most right this year.

[SnyderShrugged]

If they were always right. But usually the guy who was most right last year is not the guy who's most right this year.

How about the guy thats been most right for more than 20 years?

[DjTj]

So the ones who DID know are psychics according to this logic, thus should be listened to more closely

Actually, I think you are committing a logical fallacy. Any college player who fails to register for the NFL draft will not be drafted. This does not mean that every college player who registers for the NFL draft will be drafted. A person who fails to predict the housing crisis is not a psychic. That does not mean that anyone who predicted the housing crisis is a psychic.

And thus should not be endowed with the power to create unlimited amounts of, what is considered the primary source of wealth on earth, in relative secrecy.

Which human could you possibly trust with this power?

I agree that there should be more transparency in the operation of the Federal Reserve, and in many government operations. I disagree that the possibility of making a mistake should prevent us from trying to enact monetary policy at a national level. The Federal Reserve has generally done better than any other nation in keeping our currency strong. We can learn from our mistakes without simply tearing down our institutions.

[SnyderShrugged]

Actually, I think you are committing a logical fallacy. Any college player who fails to register for the NFL draft will not be drafted. This does not mean that every college player who registers for the NFL draft will be drafted. A person who fails to predict the housing crisis is not a psychic. That does not mean that anyone who predicted the housing crisis is a psychic.

I agree that there should be more transparency in the operation of the Federal Reserve, and in many government operations. I disagree that the possibility of making a mistake should prevent us from trying to enact monetary policy at a national level. The Federal Reserve has generally done better than any other nation in keeping our currency strong. We can learn from our mistakes without simply tearing down our institutions.

I like the dodge of the spirit of the question.

[Ellis]

Which human could you possibly trust with this power?

Chuck Norris.

[JimboDaMan]

How about the guy thats been most right for more than 20 years?

I get that you truly believe that, but it's open to considerable debate.

[GibbsFactor]

They are human, and thus fallible.

I trust that their concerns are generally aligned with those of country as a whole. The article shows that they were at least aware of the housing slowdown, and they were thinking about how it might affect the broader economy. They were just wrong about it.

Except Bernanke, interestingly.

Nobody knew how deeply Wall Street was invested in the housing market. The banks themselves (which are filled with very smart people all trying to make money) did not realize the extent of the risks they were taking.

The Fed has done a decent job of keeping us afloat in the wake of the crisis. (At least we're doing better than Europe). It would be nice if they were psychics, but they're only human, and we can't expect them to save us from ourselves all the time.

How could they have been that wrong though? I just don't buy it. I think it's much deeper than that. I believe they've been instructed wrong and the entire system is fundamentally flawed.

Here I am, just some random IT guy that KNEW without a shadow of a doubt that trouble was brewing and I took action to help myself such as waiting on buying a house and buying up commodities a year before the **** hit the fan.

The entire Chicago school of thought is wrong and everyone that's spent money on finance education should demand a refund. It's all built on fraud and how to manipulate it. There is no actual "common sense" being laidd out.

[DjTj]

How could they have been that wrong though? I just don't buy it. I think it's much deeper than that. I believe they've been instructed wrong and the entire system is fundamentally flawed.

Here I am, just some random IT guy that KNEW without a shadow of a doubt that trouble was brewing and I took action to help myself such as waiting on buying a house and buying up commodities a year before the **** hit the fan.

Well, they knew the housing market was in trouble. It's not like they were in denial about that. They just misunderstood the degree to which the financial sector was invested in the housing market, and the illiquidity of those investments, which made it difficult to move the money into other investments when the crash began.

You and a minority of individuals suspected something was wrong, and took action to plan for it. But other large entities, based not on any particular economic school of thought, other than the unrelenting pursuit of higher profit margins, continued to pursue risky strategies that ended up destroying some of the largest banks in the world and taking the rest of us down with it.

The entire Chicago school of thought is wrong and everyone that's spent money on finance education should demand a refund. It's all built on fraud and how to manipulate it. There is no actual "common sense" being laidd out.

I think many in the economics profession would agree with you, and they're all taking a hard look at themselves.

I actually posted a thread about it two years ago: http://www.extremeskins.com/showthread.php?297336-Krugman-%28NY-Times%29-How-Did-Economists-Get-It-So-Wrong

In any case, I think that anyone who thinks they have it all figured out is wrong. The system is incredibly complex, it is always changing, and there will always be more to learn. 20th-century economists have fallen victim to the same hubris as 19th-century physicists. Very smart people trying their best to figure something out will still be wrong about a lot of things.

[SnyderShrugged]

I get that you truly believe that, but it's open to considerable debate.

ahhh, no, its really not

[Hubbs]

They are human, and thus fallible.

...and thus should not be given the power to run the entire economy.

A lot of people who aren't giant economic nerds like myself think I'm exaggerating with that statement. I'm not. Once you dig into it, you realize how powerful the control of a currency is. Generally, we as Americans fundamentally reject the central planning of our economic actions. We do so in such passionate fashion that it can lead to something like McCarthyism, a terrible overreaction to the rise of the Soviet Union. Yet, rather inexplicably, we have no problem with the central planning of the single greatest economic force within any given economy.

You'd better hope that the fallible humans you entrust with that power are right in their assessment of one of the most complex systems in existence. Because if they're not, we're all screwed.

I trust that their concerns are generally aligned with those of country as a whole.

The road to hell....

The article shows that they were at least aware of the housing slowdown, and they were thinking about how it might affect the broader economy. They were just wrong about it.

Oh, they were "just" wrong about it? Yeah, that seems to be the kind of thing that should be dismissed in the same manner as a friend being wrong about which Lotto numbers will win this week. This giant economic force which they clearly didn't comprehend was about to cause incalculable damage to both the American and world economy... and they were "just" wrong about it. Oops! Aw, shucks! Better luck next time!

Except Bernanke, interestingly.

This might be the most wrong statement ever written in the history of ES.

Nobody knew how deeply Wall Street was invested in the housing market.

Oh, yes they did. Nobody cared how deeply Wall Street was invested in the housing market.

The banks themselves (which are filled with very smart people all trying to make money)

...through fraudulent and economically distorting means...

did not realize the extent of the risks they were taking.

To a certain extent (to over-use a word), yes they did. To a much larger extent, this is why nobody should have the power to make decisions that can be legally enforced throughout the economy when such decisions are arguable at best. Nobody should have the power to say, "This benchmark interest rate is exactly the best rate for the American people." Such a power is no different than the power to say, "This price for a gallon of milk is exactly the best price for the American people," with the effect of setting the price of every gallon of milk at every grocery store in the country at whatever a bureaucrat in Washington deems best. Price controls don't work. Period. End of story.

The Fed has done a decent job of keeping us afloat in the wake of the crisis.

No, the Fed has done a decent job of kicking the can and postponing the full force of the crushing deflationary bust that is the inevitable result of an artificial boom created by its own policies. It's like you're thanking a doctor for keeping you on life support after he gave you cancer by flooding your body with radiation to kill a common cold virus.

(At least we're doing better than Europe).

Oh, you mean that place where the only common across-the-board economic policies were artificially low interest rates to generate false economic "good times," and not the same deregulation laws, not the same Community Reinvestment Act, not the same Fannie Mae and Freddie Mac? Yeah, why in the world is Europe suffering an even worse crisis rooted in the mechanics of debt?

It would be nice if they were psychics, but they're only human, and we can't expect them to save us from ourselves all the time.

Your ability to write things like this while simultaneously supporting the granting of superhuman economic powers to people who are "only human" is rather astounding.

Actually, I think you are committing a logical fallacy. Any college player who fails to register for the NFL draft will not be drafted. This does not mean that every college player who registers for the NFL draft will be drafted. A person who fails to predict the housing crisis is not a psychic. That does not mean that anyone who predicted the housing crisis is a psychic.

I agree that there should be more transparency in the operation of the Federal Reserve, and in many government operations. I disagree that the possibility of making a mistake should prevent us from trying to enact monetary policy at a national level. The Federal Reserve has generally done better than any other nation in keeping our currency strong.

:ols:

What in the name of **** are you talking about? The Fed has participated in the consistent devaluing of our currency for a century, and is currently involved in the worldwide "race to debase" that's predicated upon flawed models of economic growth which lead to the absolutely insane notion that we ultimately benefit from winning a battle to be able to gain less real stuff in exchange for our colorful pieces of paper that we can print at will than people in other countries can gain from us in exchange for their colorful pieces of paper that they can print at will. We actively desire the reduction of an ability to essentially buy things for free. We do this because we hold an equally insane notion that jobs are an end, rather than a means. If that doesn't raise a red flag in your mind, I don't know what would.

We can learn from our mistakes without simply tearing down our institutions.

You very much appear to be making the assumption that our mistake couldn't be one of our institutions.

[DjTj]

A lot of people who aren't giant economic nerds like myself think I'm exaggerating with that stateYou'd better hope that the fallible humans you entrust with that power are right in their assessment of one of the most complex systems in existence. Because if they're not, we're all screwed.

Well, I don't really trust them. I expect them to make mistakes. But I don't expect that we're all screwed when they make mistakes. That's probably the biggest difference between my worldview and yours.

This might be the most wrong statement ever written in the history of ES.

:ols:That's really saying something when people were advocating for John Beck at the start of this season. The article simply points out that in a room full of people dismissing the risks, Bernanke at least hedged. He certainly wasn't sure of himself to do anything, and in the end, he ignored the problem. But he may have been the least stupid in a room full of idiots.

Oh, yes they did. Nobody cared how deeply Wall Street was invested in the housing market.

Now I don't think that's true at all. Lehman's books weren't open to everyone. AIG wasn't fully disclosing their exposure. Sure, there were certain people who knew things about certain banks, but nobody had added it all up at the time.

To a certain extent (to over-use a word), yes they did. To a much larger extent, this is why nobody should have the power to make decisions that can be legally enforced throughout the economy when such decisions are arguable at best. Nobody should have the power to say, "This benchmark interest rate is exactly the best rate for the American people." Such a power is no different than the power to say, "This price for a gallon of milk is exactly the best price for the American people," with the effect of setting the price of every gallon of milk at every grocery store in the country at whatever a bureaucrat in Washington deems best. Price controls don't work. Period. End of story.

Semicolon; there is a significant difference between controlling the price of milk and controlling the discount rate. You use the word *should* a lot, but what is your basis for imposing such a normative view? There would be significant complexities in creating an internal currency market that is similar to the market for milk. How would we structure such a market? Was Europe doing better than us when they had multiple currencies? Why did they try to move to a single currency?

You very much appear to be making the assumption that our mistake couldn't be one of our institutions.

I think that mistakes are distributed throughout the system, and I will never claim that our monetary system is perfect. There are certainly changes that can and should be made. But I reject the simplistic idea that the entire system is being run by idiots, and that the best solution is to blow the entire thing up and implement a hypothetical plan that has not been tested in the real world.

Which country's monetary policy has been better than ours over the past century? Sure, we ****ed up big time this time around, but it doesn't seem like anyone else has really figured out how to take advantage of our failings. (Maybe China? I don't think you're advocating a monetary policy more like China though, are you?) Show me how Switzerland or Germany or China is doing better than us, and I would be willing to listen to concrete ideas for change.

Criticizing the current system does not prove that there is a better alternative. If all you offer me is doomsday scenarios and radical ideas about recreating the system in the image of a niche economic philosophy, I'll continue to be very skeptical.

[Hubbs]

Okay, before addressing anything of substance, I think I should respond to this:

:ols:That's really saying something when people were advocating for John Beck at the start of this season.

:ols:

When you're right, you're right. And damnit, you're right. I withdraw my previous hyperbole.

Anyway, on with the show:

Well, I don't really trust them. I expect them to make mistakes. But I don't expect that we're all screwed when they make mistakes. That's probably the biggest difference between my worldview and yours.

Then—and I wish I could say this in a completely friendly way, but I honestly don't think there's a way to do that—I don't think you've spent enough time studying the effects of debt on prices, the cumulative effect of individual debts upon an entire economy, and the enormous economic assumptions that are made by giving the Fed the powers that it has.

I really want to emphasize that I'm not at all saying this as part of a view of you as a person. I used to have the exact same opinions that you're offering here. My opinions only changed because I developed an incredibly nerdy interest in economics, while most people will find better things to dive into, and because I actually had the time to learn what I learned, a luxury that a lot of people don't have. But as a result of these unusual circumstances, I went from a moderate liberal who would have supported the Fed in this kind of conversation to a rather strong-opinioned (to put it mildly) libertarian who thinks the Fed is inherently problematic, all without any intention of doing so. And this happened, in part, because I was particularly interested in debt. The Fed's ability to influence debt ultimately means that when the Fed is wrong, we are, indeed, all screwed in a general sense. I say "in a general sense" because there are of course a select minority of people who profit by the Fed's mistakes. But even then, I would argue that in a long-term sense, they're also screwed, because individual wealth is relative and when the country suffers, we all suffer in some way.

The article simply points out that in a room full of people dismissing the risks, Bernanke at least hedged. He certainly wasn't sure of himself to do anything, and in the end, he ignored the problem. But he may have been the least stupid in a room full of idiots.

Well, if that isn't a ringing endorsement of our system I don't know what is.

Now I don't think that's true at all. Lehman's books weren't open to everyone. AIG wasn't fully disclosing their exposure. Sure, there were certain people who knew things about certain banks, but nobody had added it all up at the time.

I'm not saying that everyone knew every last detail about how thoroughly Wall Street was invested in real estate. I'm saying that the people in charge knew enough to know that if real estate suffered a significant downturn, there would be devastating ramifications throughout the economy. I'm willing to add that I'm also saying that even though these people knew this, they were willing to go in front of television cameras and say the exact opposite because they believed doing otherwise would create a self-fulfilling prophecy of a major crash. Which is partially correct. It would indeed have had that effect. The flaw in their thinking is that such a crash could be avoided so long as they said the right things. This is best highlighted by a statement made by perhaps the eurocrat of all eurocrats, Jean-Claude Juncker, regarding Europe's continued financial downward spiral:

"When it becomes serious, you have to lie."

I'm guessing he regrets admitting that in public.

Semicolon; there is a significant difference between controlling the price of milk and controlling the discount rate.

Technically, we're really talking about the federal funds rate moreso than the discount rate. But anyway, please describe this difference. I'm going to go ahead and guess that the description will involve some variation of, "Well, you see, the federal funds rate is really-super-important, and therefore should be centrally controlled."

You use the word *should* a lot, but what is your basis for imposing such a normative view? There would be significant complexities in creating an internal currency market that is similar to the market for milk. How would we structure such a market?

The same way we "structure" the market for milk. For the most part, we don't.

Also, I'm not really sure how I'm using "should" any more than anyone else who would be engaging of a discussion of the means by which Americans, well, should be able to exchange goods and services with each other. There has to be some system recognized by the law of the land. If you're not using the word "should," you're doing nothing more than using some sort of convenient grammatical replacement.

Was Europe doing better than us when they had multiple currencies? Why did they try to move to a single currency?

Those are not the proper questions, because the overall evaluation of any given country's economy, or in this case any given set of countries' economies, is dependent upon much more than any one single factor. The proper question is, "Would the members of the eurozone be in a better position today if they still had their own currencies than they are with a shared currency?" And ironically enough, I happen to be somewhat aligned with the Paul Krugmans of the world when I say the answer is yes, although Krugman still buys into the silly notion that if the ECB would only go on its own printing spree, it would accomplish something more than the final act of can-kicking.

The euro essentially acts as a currency peg maintained by a group of countries with vastly different labor markets, regulations, government spending, pension systems, and I could keep going but I don't really think I need to at this point. The desire to maintain a currency peg has led to complete economic ruin for many countries. We're seeing such ruin play out, in real time, right before our eyes in Europe. If you don't think that Greek leaders would love to have the drachma right now, you're kidding yourself. They're doing whatever they can to keep the euro at this point because they (correctly) believe that bringing back the drachma would involve tremendous economic pain. It would. But that's very different than suggesting that Greece would be better off if it had kept the drachma in the first place.

As for the "why," it depends on the country, but generally there were two larger goals driving the shift to the euro. The first was an extension of the real goal of the EU itself, economic cooperation that would end the history of countless wars in Europe. The second was to "team up" in order to compete with the United States.

I think that mistakes are distributed throughout the system, and I will never claim that our monetary system is perfect. There are certainly changes that can and should be made. But I reject the simplistic idea that the entire system is being run by idiots, and that the best solution is to blow the entire thing up and implement a hypothetical plan that has not been tested in the real world.

First of all, I'm not saying that the entire system is run by idiots, I'm saying that to empower any human being or set of human beings with control of such fundamental forces within an economy is to empower a person or people that will inherently be wrong about a great deal of things, no matter how hard they study, how much they know, or how many times they get to attempt to "make things right." To create such power is to misunderstand how and why free markets work in the first place. It's the result of what F.A. Hayek called the "pretense of knowledge."

Secondly, I would suggest that you seem to be making a great deal of assumptions if you believe that the majority of the changes that I would make have "never been tested in the real world." You are aware that the Fed is not as old as the United States, right?

Which country's monetary policy has been better than ours over the past century? Sure, we ****ed up big time this time around, but it doesn't seem like anyone else has really figured out how to take advantage of our failings. (Maybe China? I don't think you're advocating a monetary policy more like China though, are you?) Show me how Switzerland or Germany or China is doing better than us, and I would be willing to listen to concrete ideas for change.

Please explain how you know that it's specifically our monetary policy that was the primary cause of our economic success in the 20th century. Again, you appear to be suggesting that one single factor determines whether or not any economic success can be attained. You also appear to be suggesting that monetary policy is somehow an international zero-sum game, that if we fail then our failure should automatically result in another country succeeding. This is not the case. And no, I'm not advocating China's policies. China has in fact made greater monetary mistakes than our own, and is in the first stages of repercussions. They are at the same point that Japan was in the mid-1980's, when everyone was saying that Japan was destined to take over the world economically. Today, we look back at those predictions and laugh. Decades from now, we're going to look back on the glorious predictions being made about China and laugh even harder. I would suggest Googling "China" and "real estate bubble" for an example of what will be one of the primary drivers of the Chinese crash. It makes our own bubble look like a quaint blip on the economic radar. "China" and "ghost cities" would be another good combination.

The fact is that our economic success led the world to copy many of, and eventually most of, our economic policies. In many cases, such as the general recognition that free markets spur economic growth, this was a good thing. In the case of monetary policy, this was not, but it is only recently that a significant number of economists and business analysts became willing to consider this possibility. It's very counter-intuitive, but the case for free markets was also counter-intuitive at first.

Criticizing the current system does not prove that there is a better alternative. If all you offer me is doomsday scenarios and radical ideas about recreating the system in the image of a niche economic philosophy, I'll continue to be very skeptical.

No, it doesn't. But quite honestly, I don't know what you're talking about. I'm addressing your points on a case-by-case basis. If there's something that I'm saying that you'd like to know more about, all you have to do is ask. This is obviously something I care about, and therefore I'm always willing to provide more information about it as long as I have the time.

[GibbsFactor]

This is a confused wife....I thought this was a Redskins forum?

[Jumbo]

This is a confused wife....I thought this was a Redskins forum?

Well, I'm here because I see it as more of a out-patient mental health free-clinic whose participants (most of them) share an interest in the Redskins by coincidence.

[Larry]

Remembering an exchange from the show, Frasier.

Niles mentions that he has to leave for his therapy sessions with a group of lawyers.

Frasier looks disapproving: Niles. Lawyers?

Niles: I enjoy treating lawyers. They have excellent health insurance, and they never get better.

----------

Well, we never get better. .

[GibbsFactor]

Thanks for the laugh!

[Thiebear]

quite a few people called this years and years in advance.

quite a few.

[CurseReversed]

Well said Hubbs.

We seem to always come to an crossroads involving our overall faith in our systems. While some look around, and see our current failures as a result of our past institutions and systems, independent of implementation, others look at the success and greatness that we as a country have accomplished using those institutions, and assume that they cannot be fully responsible for our current failures. How could they have worked so well in the past, and all of a sudden be failing now? Our first impulse drives us to assume that because of this contradiction, our problems are not systemic but superficial, that we merely have made recent errors in judgement or management, instead of admitting that these errors are bi-partisan, systemic, and interwoven into our history. This falls right in line with a partisan mindset, allowing us to blame to policies or people of either party for the problems instead of the systems supported by both for many years.

This is the trap we fall into, that I fell into.

How can we hold the FED and our economic institutions accountable, when it is there ability to print dollars with no backing as the reserve currency for the world, that has driven so much of our progress?

How can we discern between a flaw in the system and a flaw in the systems implementation?

No graph is going to show you that the FED has been a bad idea since its inception 100 years ago, but a look at the current situation can sure tell you how it can easily become a bad idea when poorly implemented. Sometimes its the power the government carves out for itself, that is the danger to our future, not necessarily how that power is wielded by any one person or group. Once the power is carved out, it is virtually impossible to put the genie back in the bottle and sooner or later it will be abused. When that power is great, like control of the worlds money, you get the most dangerous abuse, which should become less and less justifiable to the masses.

You can usually tell when a system is headed for failure when it takes force to implement it. For instance nobody would probably even need to dismantle the FED, if you could legalize competition in currencies and eliminate its government enforced monopoly on legal tender then it would probably dismantle itself. Without the force of govt backing it, it probably would not survive.

There are many other examples where the same systems that are failing us now, enabled us in the past, inhibiting our ability to see their true nature.

The growth of our country has been great, but the powers carved out on the path to greatness have been great as well. Now they are the cause of our problems and inseparable from the paths that created them, in all their glory. The greatest of these carved out powers, and the worst of these mistakes is the FED IMO. It is going to take a lot more then mild criticism to keep it from destroying the dollar, and the middle class along with it.