Followers of the Fed have carefully analyzed the 1,865 pages of transcripts it released in February of its eight regularly scheduled meetings and six emergency meetings in 2008 and have concluded that these experts were clueless and unaware of the opening economic abyss yawning before them. Even the New York Times was forced to admit, following its review of the documents, that “Federal Reserve officials are unaware in January 2008 that the economy had already entered a recession.”
The first sign of trouble was missed entirely by the Fed’s Open Market Committee. In March 2007, the mortgage industry ceased functioning as homeowners saddled with loans they couldn’t service began to default on them in waves. In June 2007, the Dow Jones Industrial Average, which had gone vertical since the summer of 2006, hit a top of 14,000 but lost nearly 1,200 points by the fall. It then rebounded to hit what was then the Dow’s all-time high of 14,164 in November. By January 9, 2008,the market had lost 1,500 points, unemployment had risen sharply for three straight months, the housing market had begun to crater, and Fed Chairman Ben Bernanke decided to call an emergency conference meeting with his board.
As he opened the call, Bernanke remarked:
I think there are a lot of indications that we may soon be in a recession.
I think a garden-variety recession is an acceptable risk, but I am also concerned that such a downturn might morph into something more serious.
A staff report was entered into the minutes, estimating that the economy would grow nicely into the new year:
The incoming data on spending and production have, on net, led us to revise upward our estimates of real GDP growth in [the last quarter of 2007] by about 1 ¼ percentage points....
In addition, the construction data for November imply a sizable upward revision to our estimate of nonresidential construction in [the fourth quarter of 2007].
Following that staff report, Bernanke asked for input from his committee. Bernanke heard lots of good news. From Richard Fisher, head of the Dallas Fed, came this:
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