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The Unheeded Warning Round Up

January 21, 2011

Posted by Roshawn Watson under Uncategorized

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By: Roshawn Watson

Lately unemployment and the intricately-connected consumer spending have rightfully been the macroeconomic topics of the day; however, do you remember that thing called the housing bubble?

Well, leave it to Bloomberg News to do a little controversy-inspiring digging into past transcripts from Open Market Committee meetings that show how the Fed ignored warnings about a housing bubble. Moreover, a Fed adviser inappropriately derided the very people sounding the alarms. Interestingly, one of the people who raised his voice is no other than our current U.S. Treasury Secretary: Timothy Geithner.

Here’s how the situation unfolded. The committee removed uncertainty about the pace of rate increases by stating that future moves would be “measured” in every statement. “The ‘measured’ pace language helped fuel the housing boom by keeping longer-term interest rates low and was inappropriate at the time given the uncertainties about both inflation and asset prices.”

Timothy Geithner was then the New York Fed President, and he raised concerns about “the low expectations of risk and volatility in financial markets.” He regarded the economic outlook at the time “implausibly benign.” “The confidence around this view, which is evident in low credit spreads — low risk premia generally — and low expected volatility, leaves one, I think, somewhat uneasy,” said Geithner.

A few months later former Atlanta Fed President Jack Guynn remarked that he had “continuing concern about speculation in (the real estate) markets.” A month later, some staff economists gave presentations raising concerns about the housing markets, but these warnings did not result in more aggressive policy.

Additionally, the then Federal Reserve chairman Alan Greenspan countered that even dropping the word “measured” from statements “would imply that we’re really beginning to see developments out there that are moving very rapidly, and I think it’s too soon to conclude that… “(w)hatever froth there is in the housing market is becoming contained at this stage, and it’s getting contained largely because mortgage rates have moved up and are beginning to have an impact.” (December 2005)

These comments reflect Greenspan’s well-document stance of market sovereignty. We all know what happened in the following years. Clearly, in hindsight, many believe it was a mistake to ignore these warning. Of course, hindsight is also 20/20.

Often we dismiss the very people who hold the keys to redemption. My friend often says that not listening to the right people is sometimes a greater mistake that listening to the wrong people or by going with our guts.

The link for entire article is under the Economics subheading below.

Thought Question: When did you realize something wrong was going on with the economy?

Now, it’s time to do the weekly Uncommon Money News and Yakezie Round Up.

Uncommon Money News and Round Up
In preparing to write my posts, I often come across noteworthy and sometimes bizarre financial and business news. Below are links to some of these sites. Enjoy!

To my readers: I am so honored by your support. Together, we are telling thousands of the importance of financial literacy. I absolutely could not do it without you: you are vital! Thank you sincerely.

Personal Finance (Yakezie and other PF bloggers)
A Couple Quotes from Dr. Martin Luther King at Everyday Tips and Thoughts – Kris invites us to share our favorite quotes from Dr. King – I shared mine. He’s such an inspiration!

What’s Up With Inflation at DIY Investor – Robert writes about inflation an the implications to investors!

Thoughts for Tax Season at 101 Centavos -Andrew challenges some commonly held myths about taxation and offers a way to decrease your taxes.

5 Eco-Friendly Products for the Smart Saver at Moneycone -MC comes up with some great green ideas that are also economical.

Our First Condo Together at Invest It Wisely – Kevin purchased his first place; this process is so exciting. He invites us to list the pros and cons of our places as well.

The Problem That’s Always Decades Away at The Biz Of Life – The Grouch challenges us to confront our economic problems now instead of waiting until an “inevitable” crisis point.

Just a Little Bit More at Money Reasons – Don challenges us to push pass the point of resistance to our breakthroughs!

Business
Eric Schmidt is stepping down as CEO of Google, and Larry Page is taking over the company.

Apple Shares Fall 4.4% as Steve Jobs Takes Medical Leave

Goldman to Offer Facebook Shares Only to Non-U.S. Clients

Economy
The myth of ‘American exceptionalism’ implodes. Until the 1970s, US capitalism shared its spoils with American workers. But since 2008, it has made them pay for its failures

Bloomberg bombshell article: In 2005 the Fed identified the housing bubble, but 1 man, Richard Peach dismissed the research, and even ridiculed the media for pointing to the bubble. Richard Peach is still working at the Fed giving analysis

Entertainment Money News
Kristen Stewart using her money for a very good cause

Arnold — Being The Governator Cost Me $200 Million

Carnivals that I’ve participated in:
Carnival of Personal Finance #292 at My Personal Finance Journey – Setting The Course For The Impossible

Festival of Frugality at Free From Broke – Do You Save Instead of Paying Debt?

Round ups that linked to posts from this site

Kris at Everyday Tips and Thoughts – When Will Spring Be Here?
Kevin at Invest It Wisely – Weekend Reading: Snow and Ice Edition
Don at Money Reasons – MR Cache: Overwhelmed Edition
Andrew at 101 Centavos – Random Observations and Round Up links

11 Responses to The Unheeded Warning Round Up

101 CentavosJanuary 21, 2011 at 12:12 pm

Hey Shawn, thanks for the mention. Economic tone-deafness from the Fed mandarins, who woulda thunk it?
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DIY InvestorJanuary 21, 2011 at 12:43 pm

Thanks for the mention.
Interesting post. I also went through the Federal Open Market Committee minutes once they were released for the 2005 period http://www.federalreserve.gov/monetarypolicy/fomc…
when the housing market was going crazy on the back of the lowering of the fed funds rate to 1% in 2003 and 2004. My interest was seeing if the Federal Open Market Committee mentioned at all the garbage that banks were taking on off balance sheet. It is the job of the Federal Reserve to ensure a stable banking system. There was no mention as they were focused on controlling the price of short term money via the fed funds rate. In my mind they were no better than Russian oligarchs in this regard.
I was teaching a course in economics and a student who was an assistant for a mortgage broker told me that she was upset because her boss was writing mortgages for people who didn't understand them!
During this period everybody accepted what Fed Chairman said because he was viewed as a "Maestro". He said the housing market couldn't cause a serious macro downturn because housing depends on local conditions. The country, and the world for that matter, paid a severe price for heeding his views.
As an aside the Federal Reserve has the mandate to ensure a stable banking system. They failed miserably in their job under Greenspan and Bernankke who was a Fed governor during much of this period.

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watsonincJanuary 21, 2011 at 8:45 pm

Quite interesting! I remember Buffett being interviewed around this time, and he sounded mighty skeptical. Although I believed Buffett at the time over Alan Greenspan, as I could understand Buffet's logic better, I definitely appreciate how Greenspan was revered.

Thanks for commenting on this mandate.Using a word like mandate in itself implies the true seriousness of their offense.
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Money ReasonsJanuary 22, 2011 at 3:16 am

Thanks for the mention!

I read that Buffett said the derivatives (referencing CDOs, I believe) were financial weapons of mass destruction. How correct he was… I wonder why people always question him? He's almost always right about economy matters…

Sadly during the housing bubble, while I though housing prices were way to high (especially in California), I didn't see the bubble popping and the massive crash in the housing market until it unfolded.

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everydaytipsandthougJanuary 22, 2011 at 3:20 pm
watsonincJanuary 22, 2011 at 3:31 pm

Buffett is just so full of wisdom and uncanny insight. I love listening to him.

The housing bubble and subsequent market crashes hit with such a force that I think few non-insiders would have predicted. I made some major changes in January 2008 that spared me much financial grief. I want to do more on the flip side though (instead of just using such opinions to make smart saving/trading decisions)
My recent post The Unheeded Warning Round Up
watsonincJanuary 22, 2011 at 3:35 pm
watsonincJanuary 22, 2011 at 3:35 pm

I have watched my industries change too… right before my eyes. There's nothing like seeing your love ones and friends downsized or feeling unwanted. I also remember making a bid on a house that became a short sell in 2006, and my Realtor at the time, explained her observations about our market.

"smacked in the face with the obvious" so illustrative and so appropriately true.
My recent post The Unheeded Warning Round Up
The Biz of LifeJanuary 24, 2011 at 1:03 pm

Thanks for the mention. Is it any surprise that Fed policy along with lax lending standards at Fannie and Freddie contributed to the housing bubble?
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The Biz of LifeJanuary 24, 2011 at 1:06 pm

Of course, Buffett has entered into his own derivatives bet that the stock will rise from its 2008-2009 levels. Odds are that bet will pay off, but it increased the volatility in Berkshire's earnings.
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Invest It WiselyFebruary 11, 2011 at 5:10 am

Thanks for the mention, Roshawn. I'm still catching up on all of my reading so apologies that I haven't been around your site as of late. I'm leaving the best for last! 😉

Watson Inc

The Unheeded Warning Round Up

11 Responses to The Unheeded Warning Round Up

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