Nobody wanted to see it


By Luis Arroyo, in Madrid | The FOMC’s (the monetary policy decision-making body) discussion transcripts were released by the Fed with a five-year lag. Reading them is a lesson in humility and embarrassment, shame for oneself and of others due to the state of our economic ‘science’. The worse thing is the feeling that one can’t expect much more from institutions such as this because of the natural limitations of the presence of mental acuity and truth. ‘If in doubt, abstain’, seems to be the unwritten rule.

The published proceedings are those of the January 2006 meeting, when everything was apparently going smoothly but the housing market was beginning to show signs of weakness and a fall in demand.

There is nothing better than a few good jokes to push away the fear, just like the laughter transcribed of those present at the meeting who had nothing to gain or lose. Yet, some of those attending have been placed in even higher official posts like Timothy Geithner, the current Secretary of the Treasury. Surely he now wishes his words had not seen the light of day as he appears to be the silliest of them all.

The New York Times has an article that summarises the shame. Let’s say, in defense of those present, that at the time the only element that overshadowed an otherwise very solid image of growth and employment was the beginning of the ‘jam’ in the housing market. What is unforgivable is the fact that they minimised the seriousness of the situation by saying that: 1) the housing market was a small portion of the economy; 2) its contraction would be beneficial for the rest of the economy because there would be more resources available; and 3) that thanks to financial innovation, the concentration of potential risks would be transferred to other entities and be less concentrated… etc. Not a word about the huge leveraging of banks, the highest in history. Anyway, ‘What would they have done had they realised?’ It was already too late. The ball had started rolling.

What those transcriptions prove is that something is wrong with the system. The problem is that these flaws of the system are not correctable. Something is wrong with the economy and its ‘cute little’ models when the only ones who saw ‘it’ coming (the financial crisis) were the historians who picked up on the extent of the leveraging of bank assets. Something is wrong with the decision making system when mental sharpness and responsibility, the weight of serious decisions vanishes as if a magic spell ordered: ‘Forget everything you know when you walk through this door.’

The economy had slipped through their hands and they saw nothing but local problems that would not affect the whole. They spoke of the conundrum as if of a mystery (the low long term interest rates) that at the end of the day would help them justify their decisions.

But, what were they going to do if for thirty years they had done it all so well? Thirty years of bonanza, stability, employment… They had the applause of the people. The people were accomplices for they bought homes whose price went up and this allowed them to update their mortgage and buy big expensive cars, or a second or even a third home. Everything was going smoothly. It’s not like the euro, which is going downhill without brakes (and yet, Draghi dares to make even more euphemistic statements).

We can’t say they had any reason to see the warning signs. The usual three or four doomsayer cassandras warned; but, it was better to look the other way when things were better…

Luis Arroyo is a former Bank of Spain economist. He writes for

About the Author

The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.

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