Why do people still pay attention to central bankers? The last decade has shown that they’re as clueless as anyone else when it comes to spotting bubbles and dealing with consequent disasters. Transcripts of US Federal Reserve meetings in 2007 have just been released, and they show the US central bank’s members failing to grasp the scale of the impending crisis.
As 2007 began, “the Fed was still complacently disregarding problems in the housing market”, says Binyamin Applebaum in The New York Times. They could see people losing their homes and subprime lenders falling like flies, but “did not understand the implications for the broader economy”.
Fed chairman Ben Bernanke said in March he thought that the subprime sector’s impact on the broader economy was likely to be “contained”. Fed board member William Poole opined in August that signs of potential turmoil in the financial markets wouldn’t affect the real economy and Bernanke said he reckoned the “markets will stabilise”.
In June 2007, Timothy Geithner – who later became Treasury Secretary – played down the potential impact of two Bear Stearns hedge funds collapsing, yet they proved to be a warning of things to come. Only late in 2007, as it became clear that markets were seizing up, did the Fed rush to provide liquidity and slash interest rates.
Given the central bankers’ poor record, it’s rather worrying that they don’t think all this money-printing could lead to inflation. Bernanke says he’s “100% confident” he can control it. Mervyn King is also very relaxed about price rises.
This is the same Mervyn King who said in September 2007 that there would be “no lasting damage” to Britain’s banking system following Northern Rock’s collapse and that people “won’t be talking about [it] a year from now”. We have been warned.