Central banks are often justified on the basis that a complex, modern economy requires top-down management by experts. These people, it is said, can study the markets and then “fine-tune” the economy to keep it humming along.
As if the last few years haven’t provided evidence enough that such notions are pure folly, newly released transcripts of 2006 Federal Reserve meetings offer further proof. The transcripts show that the “experts” — members of the Federal Open Market Committee (FOMC) — were so clueless that even as late as December, when the housing market was displaying serious signs of decline, most showed little concern that the bursting bubble could take down the entire economy.
The committee met for the first time that year on January 31. One of the architects of the housing bubble, Alan Greenspan, was leading his final FOMC confab as Fed Chairman. The Fed’s chief economist, David Stockton, was still forecasting a 5.5-percent increase in housing prices that year, though he admitted that “the housing sector is clearly one of the biggest risks that [the economy is] currently confronting.”
Still, overall the mood was one of guarded optimism with regard to the economy as a whole — and one of sheer delight at being in the presence of Greenspan the Great. Then-Fed Vice Chairman Roger Ferguson, for instance, called the outgoing Chairman “a monetary policy Yoda,” referring to the guru of the Force in the Star Wars movies.
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Photo of Federal Reserve headquarters in Washington: AP Images