Author Topic: A look at what the Fed Reserve knew in '06 housing  (Read 1296 times)

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Offline CaseAgainstFaith

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A look at what the Fed Reserve knew in '06 housing
« on: January 12, 2012, 02:43:23 pm »
It takes a few years for the Federal Reserve to release transcripts from its monetary policy meetings, and an initial read into the 2006 documents released Thursday shows the central bank was aware of the factors leading to the housing crisis but relatively sanguine about the potential for a major meltdown.

Iin the transcript from the August meeting, it is clear the Fed knew things were not all rosy in the housing market and looking for ways to dull any coming pain. The central bank stopped hiking rates after 17 straight meetings of tightening, reflecting Chairman Ben Bernanke’s concern about the Fed’s efforts at a smooth resolution to the issues in the market.

“I remind you that the Fed has not been terribly successful with soft landings,” Bernanke told his colleagues. “We have a chance to get one. All else being equal, I think it would be good if we could achieve that.”

A brief glance at just the December and October meeting transcripts shows a central bank that has some inkling of the storm brewing in the housing market, but woefully underestimates the threat it poses.

While the Fed was not forecasting a coming crisis in 2006, it was clearly aware of many of the elements that had caused the housing bubble to inflate to dangerous proportions.

At the October meeting, Cleveland Fed President Sandra Pianalto noted that she was hearing worrisome talk that builders were going to significant lengths in order to maintain the illusion of a still-robust market for homes.

“Sellers are offering nonprice concessions, such as upgrades for appliances, carpets, fixtures, and so forth. Some builders are going to great lengths to keep published prices up,” Pianalto said. “I’ve been told stories of builders in Arizona who have been giving buyers new Lexuses as part of the overall deal so that they don’t have to bring down the prices in their subdivision.”

Later in her remarks, she expressed her concern, “that we don’t yet have a good handle on where house prices are headed and how the uncertainties surrounding house prices might affect consumer spending.” While she believed that the downside scenario of 20% nationwide price declines may yet prove overdramatic – it wasn’t – Pianalto’s statements make it clear that the Fed was aware of the symptoms of crisis as far back as 2006, well before it was able to accurately diagnose the market.

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Wow some home builders gifting lexus cars as part of the deal, that is nuts and would definitely be a red flag in my book.  Hindsight being what it is, I do wonder what made them not so much as brush it off but decide not to look into the matter more seriously until things finally went boom.
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