Guest Post: “Never Even a Whisper” at Fed’s Open Market Committee Meetings

Washington’s Blog

Ben Bernanke, William Dudley and Donald L Kohn are on the Fed’s Open Market Committee (FOMC).

They are also on the board of directors of the Bank for International Settlements (BIS) – often called the “central banks’ central bank”. And Kohn is an alternate director for BIS.

Alan Greenspan, of course, was a BIS director for many years.

Dudley is also chairman of BIS’ Committee on Payment and Settlement Systems. (Tim Geithner – previously on the FOMC – previously held that post).

So there is clearly quite a bit of overlap between the two groups.

In addition, BIS’ chief economist – William White – and others within BIS – repeatedly warned the Federal Reserve and other central banks that they were setting the world economy up for a fall by blowing bubbles and then using “using gimmicks and palliatives” which “will only make things worse”.

As Spiegel wrote last July:

White and his team of experts observed the real estate bubble developing in the United States. They criticized the increasingly impenetrable securitization business, vehemently pointed out the perils of risky loans and provided evidence of the lack of credibility of the rating agencies. In their view, the reason for the lack of restraint in the financial markets was that there was simply too much cheap money available on the market…

As far back as 2003, White implored central bankers to rethink their strategies, noting that instability in the financial markets had triggered inflation, the “villain” in the global economy…

In the restrained world of central bankers, it would have been difficult for White to express himself more clearly…

It was probably the biggest failure of the world’s central bankers since the founding of the BIS in 1930. They knew everything and did nothing. Their gigantic machinery of analysis kept spitting out new scenarios of doom, but they might as well have been transmitted directly into space…In their report, the BIS experts derisively described the techniques of rating agencies like Moody’s and Standard & Poor’s as “relatively crude” and noted that “some caution is in order in relation to the reliability of the results.”…

In January 2005, the BIS’s Committee on the Global Financial System sounded the alarm once again, noting that the risks associated with structured financial products were not being “fully appreciated by market participants.” Extreme market events, the experts argued, could “have unanticipated systemic consequences.”

They also cautioned against putting too much faith in the rating agencies, which suffered from a fatal flaw. Because the rating agencies were being paid by the companies they rated, the committee argued, there was a risk that they might rate some companies too highly and be reluctant to lower the ratings of others that should have been downgraded.

These comments show that the central bankers knew exactly what was going on, a full two-and-a-half years before the big bang. All the ingredients of the looming disaster had been neatly laid out on the table in front of them: defective rating agencies, loans repackaged to the point of being unrecognizable, dubious practices of American mortgage lenders, the risks of low-interest policies. But no action was taken. Meanwhile, the Fed continued to raise interest rates in nothing more than tiny increments…

The Fed chairman was not even impressed by a letter the Mortgage Insurance Companies of America (MICA), a trade association of US mortgage providers, sent to the Fed on Sept. 23, 2005. In the letter, MICA warned that it was “very concerned” about some of the risky lending practices being applied in the US real estate market. The experts even speculated that the Fed might be operating on the basis of incorrect data. Despite a sharp increase in mortgages being approved for low-income borrowers, most banks were reporting to the Fed that they had not lowered their lending standards. According to a study MICA cited entitled “This Powder Keg Is Going to Blow,” there was no secondary market for these “nuclear mortgages.”…

William White and his Basel team were dumbstruck. The central bankers were simply ignoring their warnings. Didn’t they understand what they were being told? Or was it that they simply didn’t want to understand?

Yet, White said (h/t Edward Harrison) in a short, must-see talk last week that former long-time St. Louis Fed president William Poole told him that there was never even a whisper of these basic concepts at a single FOMC meeting.

Indeed, White says that – even today – the Federal Reserve is doing the same old thing, reading off of the same playbook that caused the Latin American crisis, the Asian meltdown, the Long Term Capital meltdown, and all of the other financial crises of the last couple of decades. And see this.

White, of course, argues for more accurate models which take into account real-world factors such as debt stocks, and include a time-frame longer than 2-year inflation targets or 4-year election cycles.

But as Simon Johnson has repeatedly pointed out, economics used to acknowledge that politics had an important affect on economic policy, but now the economics profession – as a whole – tries to pretend that it is strictly a mathematical and technical art form.

And as I documented last October, economists are trained to ignore – and central bankers and regulators rewarded to the extent that they ignore – the real world.

And we cannot improve our models and understandings of how to prevent another crisis unless the truth of what caused this crisis is openly discussed (under subpoena power); and see this). If the government’s entire strategy remains to cover up the truth, then we won’t have the chance.

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About George Washington

George Washington is the head writer at Washington’s Blog. A busy professional and former adjunct professor, George’s insatiable curiousity causes him to write on a wide variety of topics, including economics, finance, the environment and politics. For further details, ask Keith Alexander…


  1. sam hamster

    From the Spiegal article, regardeing the Bank of International Settlements:

    “Naturally, the building is largely bugproof, the goal being to prevent anything from leaking to the outside and any unauthorized individuals from penetrating into its interior. There are no public minutes of the meetings. Everything that is discussed there is confidential. The word transparency is unknown at the BIS, where nothing is considered more despicable than an indiscreet central banker.

    So, you are saying that Williams White’s tree fell at the BIS, but it didn’t make a sound.

    1. Gary Anderson

      Sam, the BIS inner workings probably were laughing at White. Or they used White as a cover. Basel 2 in 1998 allowed off balance sheet banking. The table was set, the BIS was present. They have no excuse. They were a part of the ponzi scam.

      1. Gary Anderson

        And I want to add, Greenspan wanted the oil ministry in Iraq secured first thing. He also wanted the adjustable loans used en masse in Feb, 2004. Greenspan wanted petrodollars and used ponzi loans to finance the taking of Iraq.

        The ponzi housing scam was planned, and it was planned out of economic weakness of the developed western world.

  2. kevinearick

    So, it turns out that cavepeople are the experts “steering” the economy, and inbred human behavior doesn’t change in real time, regardless of overwhelming evidence of need.

    What is a self-adjusting economy to do?

    Asset prices and return to protected labor is falling. Energy does not disappear. Where is it going? Into the unmeasured market. Return to highly skilled and mobile, unprotected labor is going up. As it goes up, those participants are feeding the less skilled, less mobile participants. In the aggregate, measured return is going down, which shorts the short caused by demographic deceleration.

    Bill Gates is a figurehead, with numbers in accounts. He knows what the technology designers want him to know. What do all the financial transactions in the measured economy have in common? The sides betting against the middle, with the same player on both sides, constantly employing new words to paper over the reality, and increasing mechanism complexity to both obfuscate and process the transactions. That costs. These economies may only exist on the backs of slave economies, which are increasingly expensive to maintain under conditions of global communication.

    And government is beating itself in the head, with hammers in both hands, trying to capture the unmeasured economy, for delivery to the completely corrupt, measured economy, demonstrating on a daily basis who it works for, and it’s not the taxpayer.

    The taxpayer is getting raped on every side, which is why more and more individuals are entering the unmeasured economy, building up potential energy, and creating a vicious, downhill spiral for the measured economy, despite the messages delivered on all the teleprompters.

    How can the US Supreme Court give Congress the ability to choose its voters, and thereby set up permanent government to divide and conquer the market, from both sides, unless the constitution has already been voided? The US Constitution was not designed to manage an economy of 300 billion, or a global economy of 7 billion. It’s a primitive tool, under the control of cavepeople.

    Global, virtual economies are balancing the system, from a distance, well beyond the system scope. Until government adapts appropriately, it will not “see” these economies, and may only increase tax receipts by accelerating debt. Global leverage in the US economy is something like 200:1, which tells you how far away from focus the virtual economies are.

    Now, government is gearing up to raise child slave support across the board, and arbitrarily assign individuals to the sex offender list. It has given itself the power to make the individual a non-person, sex offending, terrorist, with no due process, as an example to others. Inadvisable.

    There is nothing left of their expert brains to think with; all they can do is what they know how to do, faster, increasing the pressure and decreasing the volume, on themselves.

    It’s like watching the fire service guys trying to troubleshoot their circuits in vain, while telling you how superior thay are, and that you should get similarly certified, over and over and over again. What a s— show.

    Are things still stabalizing / falling less fast in the measured economy?

    1. kevinearick

      Inputs, Misdirection, & Outputs:

      you ever notice that the fire trucks are constantly going somewhere, and when they get there, all the firemen are standing around?

      I love it when the physics and engineering departments come out.

      One time I suggested that they make a physics student an apprentice. They didn’t want anything to do with that. I even offered to put up 5k myself. Better to have them working at McDonalds, and designing better ways to drill for oil at the behest of corporations, than find out how truly f—- up the university system is, I suppose.

      Put ’em on a treadmill, under fluorescent light, and don’t ever let them see daylight. After all, what does a regenerative elevator have to do with physics, and why would we want anyone to have any kind of practical experience watching the corporate/government feedback loop in action?

      Keep everyone in their cubicle. We wouldn’t want any kind of original thought process interrupts.

        1. kevinearick

          Liked the tunes.

          Last time with apprentice, put on Beyond the Valley of the Dolls.

          Cultural divide times 2.

          1. Skippy

            Having marked the half way point in life, I have had the displeasure to sit in boardrooms and discuss the finer points of life under triple canopy with real capitalists…I prefer the later more and more every day.

            Skippy…festive costumes to beguile the seekers/believers or naked for all to see…ones company does say something about the man…eh.

  3. Frank Ohsen

    All these learned opinions from the expert brains. Which brings something to mind of late I’ve been pondering.

    Who do you think is the smartest “economist-type” out there?

    After much perusing, listening, and lurking, I’m leaning towards Yves these days. Overall from micro to macro she’s just superb isn’t she? (No, this is not a brown nose manuever either you smart asses. Ok, ok, I know what you’re thinking. Maybe just a little rubbing is all. But hey it’s deserved rubbing.)


  4. steve from virginia

    Not Even A Whisper!

    White, of course, argues for more accurate models which take into account real-world factors such as debt stocks, and include a time-frame longer than 2-year inflation targets or 4-year election cycles.

    But as Simon Johnson has repeatedly pointed out, economics used to acknowledge that politics had an important affect on economic policy, but now the economics profession – as a whole – tries to pretend that it is strictly a mathematical and technical art form.

    And as I documented last October, economists are trained to ignore – and central bankers and regulators rewarded to the extent that they ignore – the real world.

    Blah, blah blah!

    Here’s a fifteen minute speech by an obviously smart, very nice fellow (reminds me a bit of Steve Keen) who doesn’t mention energy or fossil fuel dependency ONCE even though the entirety of modern and post- modern quote- unquote civilization is absolutely and totally leveraged to its waste …

    Without this accelerated waste our so- called way of life collapses! Talk about flow versus stock; the flow of garbage into landfills is the totality of our GDP! Disagree? Prove me wrong!

    There is no thought is given to how reductions in relative supply effect credit and thence price. No thought given to how price increases effect – and are effected by – business margins. How the economies and currencies react when the prices increase to upper bound levels where economies malfunction. How the ways of earning a living for billions is effected and how not one bit of this sequence is a part of the so- called economics ‘professional dialog’!

    The issue has been co- opted by ideologues and shills for the energy and auto businesses. The inability of the economics profession to acknowledge the primacy of physical inputs is maddening! It’s like a plumber who doesn’t know what a toilet is!

    Our real economic crisis is a relative shortage of fossil fuel energy, not finance or monetary policy which are peripheral and at bottom irrelevant. No energy means no economy, stupids.

    An energy shortage in today’s ‘just- in- time’ world means a food shortage, then what?

    Until the economics and policy businesses take their heads out of their hindquarters and start looking at the total picture – including inputs as first principles – there will be no forward progress.

    The time to pull heads out of nether regions is NOW, not six weeks or five years from now. We simply don’t have the luxury of time.

    1. George Washington Post author

      I know about peak oil:

      And – personally – I’m a big believer in decentralized microgeneration:

  5. Skippy

    Put to music ala 80s

    Sweat my youth away
    With the rules we have to play
    Speeding through your magazine
    Pistol, pavement, no T.V.
    Talk and talk
    No time, night time
    Burnt inside

    Here comes the daylight, here comes my job
    Uptown in the penthouse or downtown with the mob
    Here comes the night time, here comes my role
    Goodbye to the pavement, hello to my soul

    Now here comes my job
    Credit, bleeding with the mob
    Dreams become ideals
    No one knows the way I feel
    Love to love
    Daytime, right time
    All my life


    Feel safe in the crowd
    An no one admits they’re crying aloud
    My career fits like a glove
    Knowing no orders can come from above
    Work and work
    Full time, part time
    Anytime at all

    As you face the wall
    God make it this time or never at all
    Before your chance has gone
    Captain this lead role and you’ll be the one
    Shine and shine
    This time, my time
    Make me free at last

    Skippy…crank it!

  6. Glen

    So all I’m learning here is that apparently the BIS and the central bankers think that 99.9999% of the world is a bunch of idiots and/or powerless to do anything to stop the pillaging and looting.

    I’m scared they’re right.

    1. Glen

      I’ve listened to Mr. White a couple of times now, and each time I’m just appalled at the repeated warnings that WE ALL MADE MISTAKES. I realize he is not speaking for or to the whole world but…

      Again, I have to wonder how stupid I’m supposed to be. 99.9999% of the world did not make these mistakes. I saw the housing bubble, the massive debts, the systematic raping of the middle class AND DID WHAT I COULD (which is not much!)

      I did NOT make these mistakes, but me, and the other 99.9999% of the world is being told to PAY for these mistakes.

      I realize now the biggest mistake I made was not being a crook like the 0.0001% that screwed the world. These crooks are going to walk away from this mess (that the rest of us now live in) and live the easy life.

  7. Francois T

    The magnitude of the denial is breathtaking, isn’t it?
    After all the incompetence Chopper Ben displayed before the crisis, Obama STILL decided to keep him…why exactly?

    In the extraordinarily tricky times we’re going trough, how can you trust someone who systematically refuse to listen to any analysis that does not match their preconceived notions to such an important post as Fed Chairman?

  8. maniam

    “…crisis lead to opportunities.”
    create chaos and take advantage.
    paulson&co made billions while the world faced meltdown.and after he retired from the fed,greenspan joined paulson&co.
    great guy!
    the jackport is bigger than this,see what the bankers bought on fire sale,etc.

  9. Gepay

    In this post the BIS sounds like how you would want the rulers to be. They want the system to work. In conspiracy world, the BIS is definitely part of the elite that runs the world. According to Engdahl it was decided in the 70s to raise the price of oil to keep the developing countries in line with debt slavery. It took oil to get to $150 a barrel to finally pop the US housing bubble. Then it went back down to $30 and is now at $80 a barrel with no increase in demand. So much for supply and demand determining prices

    To quote, In the year 1990, Leon Hess, stated at a hearing held by the U.S. Senate Committeee on Governmental Affairs:

    “I’m an old man, but I’d bet my life that if the Merc [New York Mercantile Exchange] was not in operation there would be ample oil and reasonable prices all over the world, without this volatility.”

    Mark Twain said, “Sometimes I wonder whether the world is being run by smart people who are putting us on or by imbeciles who really mean it.”

    The IMF (Simon JOhnson and such) sounds reasonable lately also. Didn’t Rogoff et al work for the IMF. Usually I see the IMF as using their SAPS to make saps out of poor people in the less developed world. I remember what Stiglitz had to say about the IMF and the World Bank policies. In the Asian crisis, it was the IMF with Geithner in charge of “fixing it”. All these crises, the Mexican crisis , the Asian crisis, the rape of Russia, the 3rd world debt had a lot to do with ‘hot money’ wandering the globe creating problems with disaster capitalism following in the wake to clean up. Governments have been impotent so Central bankers, the IMF and such have contained the crises and kept us lurching onward toward our present situation. It would be interesting to know what the Bilderbergers decided would be the best way to handle this crisis. It still is a crisis for Main Street USA, not to mentionn Iceland, Greece, Spain, Ireland, Portugal Latvia and the Baltics, or HUngary and Roumania or… That is, make it short and painful or drag it out for a decade.
    Will Israel bomb Iran or will it be successful in getting the US to do it sending us into the next downturn? Or is this some kind of big game they are playing to make us forget about the permanent bases in Iraq?

    Basically it seems the ‘too big to fail’ are using the tricks they used in the 3rd world (read The Blood Bankers –
    much about JP Morgan and Latin America, their sucked orange)to the developed world. notice JP Morgan and the city of Birmingham, Ala.

    Congress has been bought with less than a billion and the TBTF get trillions when they need it.

    I mean, who really decided that Greenspan would be the next head of the FED, after Volker had fixed the stagflation problem caused by the decision to raise oil prices in the 70s. He was a necessary ingredient in the housing bubble. … “Edward Gramlich, who was Fed governor from 1997 to 2005, said he proposed to Mr. Greenspan in or around 2000, when predatory lending was a growing concern, that the Fed use its discretionary authority to send examiners into the offices of consumer-finance lenders that were units of Fed-regulated bank holding companies.
    “I would have liked the Fed to be a leader” in cracking down on predatory lending, Mr. Gramlich, now a scholar at the Urban Institute, said in an interview this past week. Knowing it would be controversial with
    Mr. Greenspan, whose deregulatory philosophy is well known, Mr. Gramlich broached it to him personally rather than take it to the full board. “He was opposed to it, so I didn’t really pursue it,” Wall Street Journal
    Hedge funds like Magnetar are just like those shore dwellers who would move the beacons during the storm and made a good living recovering the results on the beach.

    So are the IMF and BIS really that inconsequential that they saw this present crisis happening and couldn’t do anything to stop it?
    “One bubble may be an accident,” noted a columnist in the Financial Times, “but two in the space of a decade begins to look like carelessness.

    or is it a plan?
    – not so much a plan as to use the circumstances to gain more control (let it happen>disaster capitalism – I know many, maybe a majority of workers in the US were worried whether they would keep their jobs (that is if they had a job) but knew they were working harder with no raises – wipe out the gains made by the middle classes following the last depression – gut the restraints of constitution and the Bill of Rights, oh right that is the war on drugs and terror but the laws will be in place to use to control domestic disturbances caused by economic distress.

  10. john

    On a somewhat related topic, did the WSJ twist the meaning of the the following quote from the FOMC:


    ‘Mr. Summers is merely reflecting what numerous economic studies have shown. The Federal Reserve Open Market Committee put it this way in its January minutes: “The several extensions of emergency unemployment insurance benefits appeared to have raised the measured unemployment rate, relative to levels recorded in past downturns.” It continued: “Some estimates suggested it could account for 1 percentage point or more of the increase in the unemployment rate during the recession.” That’s more than one million jobless workersAlan Reynolds of the Cato Institute has found that the average unemployment episode rose from 10 weeks before the recession to 19 weeks after Congress twice previously extended jobless benefits—to 79 from 26 weeks. Even as initial unemployment claims have fallen in recent months, the length of unemployment has risen. Mr. Reynolds estimates that the extensions of unemployment insurance and other federal policies have raised the official jobless rate by nearly two percentage points.’


    The gist of the WSJ article is that extending unemployment benefits causes people to go on the dole as opposed to finding a job. However, isn’t it the case that only people who are currently receiving unemployment benefits are counted in the official ‘unemployment’ rolls? Therefore, the unemployment rate is higher because people who are unemployed, but would not otherwise be counted as unemployed because they would not be receiving benefits but for the extension, are now being counted due to the extension of unemployment benefits.

  11. kssong

    from nyt-April 13, 2010
    Lawmakers Regulate Banks, Then Flock to Them
    WASHINGTON — Representative Barney Frank publicly rebuked a former aide this month for taking a job with a big Wall Street firm right after drafting a regulation that could affect the way the firm does business. Mr. Frank described it as an unusual transgression, one that embarrassed others working on the legislation and created at least the appearance of a conflict of interest.

    have your say.

  12. ray l love

    Smart and well informed crowd this. Someone though, I don’t remember who, asked a very important question that went unanswered. But the answer had already been given: Kevinearick ~ “It’s like watching the fire service guys trying to troubleshoot their circuits in vain, while telling you how superior they are, and that you should get similarly certified, over and over and over again. What a s— show.”

    I have believed for some time now that the global economy is reeling out of control. It isn’t that Greenspan, Bernanke, Paulson, and the rest of the top-level-financial-institution crowd is corrupt, they are in fact as honest as the system allows them to be. Nor is it that are incompetent, their access has allowed them to understand the dynamics as well the dynamics can be understood, and they are the people who are most likely the ones who are the most endowed, and who are the best prepared, to understand the existing complexities. But the complexities have evolved into a maze of of such vast potential for unintended consequences that corrective measures that might seem like rather obvious solutions, from the outside looking in, are in fact akin to slowing down a large ship that is taking on water in the middle of an ocean. The only ‘solution’ is to steam ahead full and hope that the engines don’t falter and that the fuel (capital and energy and other resources)– are ample to reach shallow water (reaching port would imply that the ship is maneuverable, the crew would feel accomplished if they were able to simply run-aground, I suspect).

    I am not able to see how else the facts add up. The financial institution ‘crew’ was well aware of the problems; but they also knew that any significant restriction of capital flows would allow the adverse feedback loops to set off a global deleveraging cycle. The pressure inherent to taking responsibility for such a complicated and unpredictable dynamics must be INTENSE+.

    I never would thought that I might be someone defending Greenspan, or someone of his Randian ilk, but… I read his recent paper, carefully and honestly, and it has since become increasingly clear to me that he is being made to be a scapegoat. And largely because what actually happened is too difficult, or too revealing, for most folks to understand. So, presumably, their vanity, or their delusional state, does not allow them to admit that they don’t understand…so, they they choose the simple, convenient, and ‘popular’ explanation. Although, just how much vain, delusional ignorance a democracy might withstand is, I suppose, a dire question that we may soon have the answer to, whether we are ready to know the answer, or not. The global economy is like a sinking ship, but the crew did not build it.

    1. Doug Terpstra

      What may be too difficult or too revealing to understand, when you cut through all the derivative-swap-obligation-QE-TARP BS, is that these guys somehow end up with all the marbles. The final score says a lot, and if all these guys ever actually to is say “it’s complicated; it’s hard work; and you can’t handle the truth” over and over again, stone-walling regulation and prosecution, despite monstrous failures, then it’s hard to accept good faith and dismiss venality. They richly deserve their coal-raking AND then some. These remind me of French aristocrats in dangerous liasons, saying “it is entirely beyond my control.” Just because Greenspin looks and sounds like a doddering old fool, let’s not be too “liberal” and excuse his sins.

      BTW, is it my imagination, or is Greenspin’s face actually melting?

  13. ray l love


    The problem with your assertions is that the people you are accusing of corruption were either wealthy in the first place (Paulson), or, able to earn far more money than what they have by making different career choices. Don’t get me wrong though, I am aware of the crony issues etc., and I have nothing to gain by defending a class of people who are at the other end of the spectrum from where I am, but I think it is misleading to assume that greed plays a very big role. It ‘is’ complicated, politically and economically.

  14. lambert strether

    What do you mean, “improve our models”?

    The crash culminated in the largest transfer of wealth upward in world history. I’d say the model was working just fine.

    Free your mind from the idea that our “public servants” are anything other than kleptocrats, and matters become much more simple and clean.

Comments are closed.