The general consensus on the board, summarized by Mr. Geithner, was that problems in the housing market had few broader ramifications. “We just don’t see troubling signs yet of collateral damage, and we are not expecting much,” he said at the September meeting.
Mr. Bernanke initially agreed, telling colleagues at his first meeting as chairman, in March, “I think we are unlikely to see growth being derailed by the housing market.” As the year rolled along, however, Mr. Bernanke increasingly took the view that his colleagues were too sanguine.” I don’t have quite as much confidence as some people around the table that there will be no spillover effect,” he said.
Some Fed officials argued that a housing slowdown would be good for the broader economy. “I really believe that the drop in housing is actually on net going to make liquidity available for other sectors rather than being a drain going forward, and that will also get the growth rate more positive,” Ms. Bies told colleagues at the committee’s June meeting. Ms. Bies could not be reached for comment Thursday.
And even Ms. Yellen did not believe that the problems in the housing market would have broader consequences. “Of course, housing is a relatively small sector of the economy, and its decline should be self-correcting,” she said.I feel for these folks. They're top-level economists and they missed signs of the largest recession of our generation. It must be embarrassing to be so publicly (to an extent) wrong. People tend to defend themselves from these problems by not making hard-and-fast predictions unless they're really, really sure or not being on record with a prediction in the first place. That's smart.
Of course, most folks aren't very good at predictions. I'm on record with a very good friend of mine from graduate school saying that vorinostat wasn't likely to make it to market -- oops. I predicted a U6-like (part-time + postdoc + unemployed) rate for chemists at 12% in 2009; it was at 9.6%. Even the most powerful DOOOOOOOOOMers can be wrong in their time horizons.
I wonder what it would be like if every utterance in conference rooms about a biological target, a series of hawt lead compounds, the yield of a particular chemical step or the identity of an impurity were recorded and transcribed, only to be released 6 years later. I'm guessing meetings would be a lot shorter in those conference rooms and predictions would fall to zero. ("XYZ8675309? Yeah, that compound will make it through tox -- or it won't.")