22 February 2014

Hair Brained

The 2008 FOMC transcripts are released. As you can see, they're extensive. More text than my single set of eyeballs really want to endure. Fortunately, the NYT has plenty of eyeballs, and have gone through them. And published a number of pieces.

What's missing from the writeups is any reference by those within the Fed to the disconnect between house prices and incomes as impetus to the crisis. If I survive chopping yet more ice from the driveway, I'll have a go at the transcripts and update. For now, here are my takeaways.

- Yellen is smarter than Bernanke and Paulson
- Quants are dumb as a sack of hair
- Fed members from fascist states are as fascist as one might expect

Here's the list of articles, in descending order of interest. Although I find them all interesting.

The Fed's Actions in 2008: What the Transcripts Reveal (The online version is much more extensive than the dead trees I read this AM.)

Fed Misread Crisis in 2008, Records Show

As Crisis Loomed, Yellen Made Wry and Forceful Calls for Action

Fed Fretted Over Reaction to Demise of Lehman

Reporter's short notes

Transcripts timeline:
Yellen: For example, East Bay plastic surgeons and dentists note that patients are deferring elective procedures. [Laughter] Reservations are no longer necessary at many high-end restaurants. And the Silicon Valley Country Club, with a $250,000 entrance fee and seven-to-eight-year waiting list, has seen the number of would-be new members shrink to a mere thirteen. [Laughter]
Which simply means that she looked out the window to discover that it really was raining, despite what the weathermen were saying. Anecdotal evidence is still evidence.

Yellen piece:
What the transcripts show is a woman who was constantly pushing her peers -- and also cleverly cajoling them -- to do more to help ordinary households, not just financial institutions. At the same time, she urged her colleagues to look at the flaws in the banks that caused the crisis in the first place. "I don't believe in gradualism in circumstances like these," Ms. Yellen said in March 2008, months before the situation came to a boil.

Fed Misread article:
The Fed's understanding of the crisis, however, was clouded by its reliance on indicators that tend to miss sharp changes in conditions. The government initially estimated, for example, that the economy expanded in the first half of 2008 because it basically assumed that some economic trends, like the pace of business creation, had continued apace.
The transcript for that meeting contains 129 mentions of "inflation" and five of "recession."
Some Fed officials have argued that the Fed was blind in 2008 because it relied, like everyone else, on a standard set of economic indicators.

Lehman piece:
Today, critics of the Treasury and the Fed say that the our-hands-were-tied argument may be an excuse, used after the fact, as a shield from criticism that they were negligent and miscalculated badly.

"It was a post-incident rationalization," Harvey R. Miller, a partner at Weil, Gotshal & Manges, said in an interview on Friday.
"Although Fed officials discussed and dismissed many ideas in the chaotic days leading up to the bankruptcy, the Fed did not furnish to the F.C.I.C. any written analysis to illustrate that Lehman lacked sufficient collateral to secure a loan," the [FCIC] report noted.

Reporters' Notes:
"While there are tales of woe, none of the 30 C.E.O.'s to whom I talked, outside of housing, see the economy trending into negative territory," said Richard Fisher of the Dallas Fed in January. "They see slower growth. Some of them see much slower growth. None of them at this juncture -- the cover of Newsweek notwithstanding, a great contra-indicator, which by the way shows 'the road to recession' on the issue that is about to come out -- see us going into recession."
And while the stock market might drop in the short term, [Jeffrey M. Lacker, then and now the Richmond Fed president] added, there was a "silver lining" to Lehman's collapse. "I don't want to be sanguine about it, but the silver lining to all the disruption that's ahead of us is that it will enhance the credibility of any commitment that we make in the future to be willing to let an institution fail and to risk such disruption again."
Life is so much more comfortable in that 1% bubble.

In sum then, no understanding that mortgages had and were outstripping incomes. Utter subservience to quants, who didn't have a clue. And, save Yellen, little concern except for their clients on Wall Street. Not a banner year. So far as cure, no indication that the Fed folks, as a whole, understood they were the last, but wrong, bastion against complete collapse. The correct approach, of course, was/is fiscal policy to restore demand, but the Republicans were and are steadfast against "giveaways" to the unworthy. That left the Fed, but recovery monetary policy is never any more than pushing a string, as we have seen. Generating a contraction, to kill dat ole debbel inflation, is yanking the gallows' rope. Works like a charm; Volker was a blessed savior for killing inflation caused by OPEC oil price hikes (not domestic profligacy). Even now, corporate America considers the Fed as constraining. Total ingrates.

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