The leaders of the Federal Reserve went around the room saluting Alan Greenspan during his last day as chairman of the central bank. Then Timothy F. Geithner, the future Treasury secretary, made a prediction.
“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.”
On Thursday, the Fed released transcripts of its meetings in 2006, offering a new window into what was on the minds of some of the nation’s top economic and financial thinkers just ahead of the financial crisis and subsequent great recession. The transcripts, which are customarily released after five years, show that Fed leaders, armed with the best economic data available, had little idea of what was looming less than two years off.
Trusted to look toward the future and make decisions to keep the economy strong, they spent some of their time patting their leader on the back and even found time to joke about what turned out to be early-warning signs in the markets. While Fed officials — including several who are in key positions today — were aware that the nation’s rapid increase in housing prices was coming to an end, they significantly underestimated how much damage the popping of the real estate bubble would cause in the rest of the economy.
In his first meeting as Fed chairman, in March 2006, Ben S. Bernanke noted the slowdown in the housing market. But he said he shared the view that “strong fundamentals support a relatively soft landing in housing,” adding: “I think we are unlikely to see growth being derailed by the housing market.”
The year began with adulation all around for Greenspan. In that January meeting, Roger Ferguson, then Fed vice chairman and now head of the TIAA-CREF financial services group, called Greenspan a “monetary policy Yoda.”
Janet L. Yellen, then president of the Federal Reserve Bank of San Francisco and now the Fed’s vice chair, told Greenspan “that the situation you’re handing off to your successor is a lot like a tennis racket with a gigantic sweet spot.”
In the six years since, Greenspan’s record — seemingly so sterling when he left the central bank after 18 years — has come under substantial criticism from outside economists and analysts. Many say a range of Fed policies under his watch contributed to the financial crisis, including keeping interest rates low for too long, failing to take action to stem the housing bubble and allowing inadequate oversight of financial firms.
A spokesman for Greenspan did not respond to a request for comment. A spokeswoman for the Fed declined to comment. Treasury Department spokesman Anthony Coley said: “Secretary Geithner was an early source of initiative at the Fed to reduce risk and make the financial system more resilient even before 2006.”
Greenspan has acknowledged in recent years that he was “partially” wrong for allowing banks to operate without enough regulation. Bernanke has defended the Fed’s decisions about interest-rate policy and the overall economy but said that “stronger regulation” would have been “more effective” at constraining the housing bubble.