Ever read old news stories dated before a major crisis and marvel at how no-one saw the carnage coming — or in the case of Archduke Ferdinand, “Who thinks visiting Sarajevo with little-to-no security is a good idea??”
Looking back with the benefit of hindsight can be a fun and interesting exercise, unless you are Sophocles.
So as Federal Reserve Chair Janet Yellen prepares to testify before lawmakers on July 12 and 13, delivering the central bank’s semi-annual review of economic conditions and monetary policy, join me on a trip down memory lane to review pronouncements by her predecessors in the lead up to, and after, the proverbial covfefe hit the fan in 2008.
A bit of background first. Mandated by the 1978 Humphrey-Hawkins Act that established full employment as one of the Fed’s dual mandates (the other being price stability), the Fed chief appears before Congress twice a year to provide an update on economic conditions and the Fed’s management of interest rate policy. The hearings are held by the House Financial Services Committee and the Senate Banking Committee on consecutive days.
So lets look back at what Messrs Alan Greenspan and Ben Bernanke [in all honesty, this is really about Ben] had to say in their testimonies in the run-up to, and after, the dark months of Fall 2008: with bonus commentary from the peanut gallery by yours truly.
Alan Greespan in his final year as Fed chair:
July 20, 2005
“In mid-February, when I presented our last report to the Congress, the economy, supported by strong underlying fundamentals, appeared to be on a solid growth path, and those circumstances prevailed through March. Accordingly, the Federal Open Market Committee (FOMC) continued the process of a measured removal of monetary accommodation, which it had begun in June 2004, by raising the federal funds rate 1/4 percentage point at both the February and the March meetings.” [Editor’s Note: The Fed was so confident they raised rates in February … FEBRUARY!!!]
“The data released over the past two months or so accord with the view that the earlier soft readings on the economy were not presaging a more serious slowdown in the pace of activity.” [You might not want to read the rest of this blog Alan]
Ben Bernanke takes over as the world’s most powerful central banker:
July 19, 2006
“ Over the period since our February report, the U.S. economy has continued to expand. Real gross domestic product (GDP) is estimated to have risen at an annual rate of 5.6 percent in the first quarter of 2006. The available indicators suggest that economic growth has more recently moderated from that quite strong pace, reflecting a gradual cooling of the housing market [If only he knew…] and other factors that I will discuss. With respect to the labor market, more than 850,000 jobs were added, on net, to nonfarm payrolls over the first six months of the year, though these gains came at a slower pace in the second quarter than in the first. Last month the unemployment rate stood at 4.6 percent [It’s now at 4.4 percent, we’ve come full circle(?)].”
On the housing market:
“ Some of the recent softening in housing starts may have resulted from the unusually favorable weather during the first quarter of the year [guess again mate], which pulled forward construction activity, but the slowing of the housing market appears to be more broad-based than can be explained by that factor alone.” [*spider-sense tingling*]
July 18, 2007
“ The pace of home sales seems likely to remain sluggish for a time, partly as a result of some tightening in lending standards and the recent increase in mortgage interest rates [Adjustable-rate mortgages were too good to be true, just like the Double-Down]. Sales should ultimately be supported by growth in income and employment as well as by mortgage rates that — despite the recent increase — remain fairly low relative to historical norms. However, even if demand stabilizes as we expect, the pace of construction will probably fall somewhat further as builders work down stocks of unsold new homes. Thus, declines in residential construction will likely continue to weigh on economic growth over coming quarters, although the magnitude of the drag on growth should diminish over time.” [This feels like watching a movie protagonist march unknowingly to his certain doom].
July, 15, 2008
“ The U.S. economy and financial system have confronted some significant challenges thus far in 2008. The contraction in housing activity that began in 2006 [Called it!] and the associated deterioration in mortgage markets that became evident last year have led to sizable losses at financial institutions and a sharp tightening in overall credit conditions [Wait until you see what’s waiting for you in September Benjamin…].”
To have the full picture of what happened over the next few months requires a review of both testimonies by Bernanke in February and July 2009:
February 24, 2009
“ The financial crisis intensified significantly in September and October [That’s like saying the Titanic’s maiden voyage was a “rocky” experience]. In September, the Treasury and the Federal Housing Finance Agency placed the government-sponsored enterprises, Fannie Mae and Freddie Mac, into conservatorship, and Lehman Brothers Holdings filed for bankruptcy. In the following weeks, several other large financial institutions failed, came to the brink of failure [#Wachovia], or were acquired by competitors under distressed circumstances [In other words, sh*t was cray].”
July 21, 2009
“ Aggressive policy actions taken around the world last fall may well have averted the collapse of the global financial system, an event that would have had extremely adverse and protracted consequences for the world economy [Ben and his merry band of central bankers saved us y’all]. Even so, the financial shocks that hit the global economy in September and October were the worst since the 1930s, and they helped push the global economy into the deepest recession since World War II. The U.S. economy contracted sharply in the fourth quarter of last year and the first quarter of this year. More recently, the pace of decline appears to have slowed significantly, and final demand and production have shown tentative signs of stabilization. The labor market, however, has continued to weaken [The Post Office still isn’t hiring though].”
July 21, 2010
“The economic expansion that began in the middle of last year is proceeding at a moderate pace, supported by stimulative monetary and fiscal policies [And then the Democrats lost the House in November. Are you familiar with budget sequestration Ben? Fun times await you in 2013].”
Hope you enjoyed that brief jog down memory lane. The economy has been on a decent run so far, fingers crossed no-one jinxes it.