Ryan Grim at Huffington Post has parsed recently released transcripts of 2004 Fed Open Market Committee discussions that show the debate over the rapid rise in housing prices and concerns about global imbalances were downplayed at Greenspan’s insistence. For instance, the minutes reveal that Fed governor from Atlanta, Jack Guynn, was worried about signs of real estate froth in his market in March:
…. a number of folks are expressing growing concern about potential overbuilding and worrisome speculation in the real estate markets, especially in Florida. Entire condo projects and upscale residential lots are being pre-sold before any construction, with buyers freely admitting that they have no intention of occupying the units or building on the land but rather are counting on ‘flipping’ the properties–selling them quickly at higher prices.
The story also notes that (quelle surprise!) the official minutes softpedaled these worries:
Reports from some contacts suggested that speculative forces might be boosting housing demand in some parts of the country, with concomitant effects on prices, suggesting the possibility that house prices might be moving into the high end of the range that could be consistent with fundamentals.
Yves here. Translation: housing prices are still justified, if looking a bit rich. And note that this is March 2004, more a full year before leading edge conventional wisdom, as measured by The Economist pointing out the existence of a global housing bubble (in a June 2005 cover story).
Greenspan’s rationale was that the public’s involvement would be uninformed and unhelpful (gee, it didn’t occur to him that they might have more facts on the ground…):
We run the risk, by laying out the pros and cons of a particular argument, of inducing people to join in on the debate, and in this regard it is possible to lose control of a process that only we fully understand.
Other Fed members raised concerns about overly low rates. Vice chairman Don Kohn was worried that lax interest rates were propping up housing prices; Cathy Minehan, head of the Boston Fed, worried about CPI increases in her region….driven by rising shelter costs. Geithner was concerned about possible financial imbalances.
June minutes showed more debate on this issue, with the Fed’s research director and vice chairman Roger Ferguson the worrywarts. There is also a discussion of what would not be called global imbalances (see p. 8-10 in particular, which discusses how much of a fall in the dollar might be necessary).