Worthwhile reading from today’s Washington Post op-ed page, “Why the Federal Reserve slept before the housing crisis.” Unlike the typical blame-the-people-whose-politics-I-disagree-with piece, this one points to a much more mundane explanation of why, in 2006, the Fed apparently ignored all the signs of a major problem.
It wasn’t that they didn’t see the housing boom or recognize that it was ending. At 2006’s first meeting, a senior Fed economist noted “that we are reaching an inflection point in the housing boom. The bigger question now is whether we will experience (a) gradual cooling . . . or a more pronounced downturn.”
At that same meeting, Fed Governor Susan Bies warned that mortgage lending standards had become dangerously lax […] But [members of the Federal Open Market Committee] — and most private economists — didn’t draw the proper conclusions.
Hardly anyone asked whether lax mortgage lending would trigger a broad financial crisis, because America had not experienced a broad financial crisis since the Great Depression […] Because it hadn’t happened in decades, it was assumed that it couldn’t happen.