Jan 23, 2012
Why did the Fed ignore the housing bubble? No one thought it would be THIS bad
23 Jan 2012
Posted by Andrew Kantor
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.