"I think you're pretty terrific too"
by digby
Surely you have seen the various stories by now about the 2006 Fed transcripts, in which our most powerful central bankers cut up like teenagers and completely miss the housing slump. It reminds me of the dialog from 'Two and a half Men" (The 10 minutes of it that I watched that one time while I was sick anyway.)
And to think our entire economic strategy has been based on "confidence" with these bozos running the show. This particular excerpt is particularly enjoyable, I think:
“I’d like the record to show that I think you’re pretty terrific,
too,” Geithner, who was president of the Federal Reserve Bank of New
York, told Greenspan amid laughter on Jan. 31, 2006. “And thinking in
terms of probabilities, I think the risk that we decide in the future
that you’re even better than we think is higher than the alternative.”
The only time I've seen that level of sycophancy and adolescent worship was at the premier of Justin Bieber's movie here in Hollywood. (And sadly, I'm not talking about the swooning little girls who were fainting and speaking in tongues, but his adult handlers.) Greenspan's godlike stature was always somewhat alarming to me, even back in the go-go years, but he reached such untouchable status that it had become a form of heresy to gainsay him. From these transcripts, it's fairly clear that these people were all courtiers in Greenspan's Palace. It's pathetic.
The fact is that there were some people outside the inner circle jerk who saw things differently. Brad DeLong pointed it out yesterday:
September 2006:
Dallas Fed President Richard Fisher: Mr. Chairman, the Eleventh District economy remains strong and continues to grow at a stronger pace than the rest of the country, with employment growth continuing at roughly twice the nation’s pace. Incidentally, home sales have not turned down in our District, so we haven’t been singing yet what we call the “coastal blues” as far as the homebuilding market is concerned. I think that’s enough said about Texas and the Eleventh District.... According to these business contacts, the outlook for economic growth is better than it sounds, whereas the dynamic of inflation is worse than it sounds. Just a few anecdotes here for, if not similitude, verisimilitude. By the way, all the interlocutors are fully aware of the shape of the yield curve—these individuals are sophisticated— and they are especially aware of what is happening in the housing market. As one CEO told me, the only subject that has been more analyzed than the housing situation is the birth of Brad Pitt’s baby. [Laughter] According to this view, if we have not discounted what has been happening in the housing market, we have been living on Mars, and I think that is an important point to take into account…
June 2006:
Paul Krugman: Over the last few weeks monetary officials have sounded increasingly worried about rising prices. On Wednesday, Richard Fisher, the president of the Federal Reserve Bank of Dallas, declared that inflation "is running at a rate that is just too corrosive to be accepted by a virtuous central banker."… [T]he real issue is whether there's a serious risk that inflation will become embedded in the economy…. [I]s that a realistic fear? Only if you think we can have a wage-price spiral without, you know, the wages part. The point is that wage increases can be a major driver of inflation only if workers consistently receive raises that substantially exceed productivity growth. And that just hasn't been happening….
It would be an exaggeration to say that there's no inflation threat at all. I can think of ways in which inflation could become a problem. But it's much easier to think of ways in which the Federal Reserve, wrongly focused on the phantom menace of a new wage-price spiral, could be slow to respond to bigger threats, like a rapidly deflating housing bubble…
As Delong quipped: "We listen to Paul Krugman because he looks at what is around him and says what he sees." I'm sure he doesn't always see it all, no one can, but his track record is far, far better than these bankers who were so busy congratulating themselves on their own brilliance that they were blind to the iceberg they were steering the global economy into.
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