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What the Fed Did and Did Not Know in 2004

The release of the Fed’s 2004 transcripts and my initial post have ginned up a number of posts and stories — including ones by Ryan Grim, Yves Smith, Matt Yglesias, Paul Krugman and Ryan Avent. In his story, Grim pulls out what sounds like a howler from then-Fed Chairman Alan Greenspan, from the March meeting transcript.

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.

Grim also notes that Greenspan wanted to keep the possible risks of a housing bubble “secret,” and that the Fed keeps its transcripts “secret” for six years. I say this from the viewpoint that Greenspan’s loose monetary policy wreaked unbelievable damage on the U.S. economy. But I agree mostly with Ryan Avent’s take on that particular quote. Here is a fuller version of what Greenspan said:

Let me first follow up on your transparency assessment. I think Cathy Minehan has raised an interesting point. I would say this: 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. We have a ratchet in here where, if we were to move forward, we can’t go back. So the concept of transparency is a very important concept but one that should be approached with a recognition that we cannot move back and forth on it.

I’m a little concerned here that by raising certain issues we may not be able to backtrack. I hadn’t thought about it when I originally read the draft minutes, but in seeing the concerns that other people had, I think there’s something here that we have to consider. I do not recall so many people raising questions about the minutes before because I think most of us read the minutes passively. That suggests to me that, if there were really a strong focus on them, we’d find a greater degree of disagreement among us about their content. Now, I don’t know whether what I just said is true.

Greenspan is weighing in on a debate about Fed transparency — that is, how much the Fed wants to reveal about its thinking on inflationary pressures and monetary policy at that particular moment. He is not talking about whether to let the public in on whether there might be a housing bubble. (At that point, Fed economists had just started sounding the alarm. In June, the Fed started hiking the interest rate.) Greenspan was worrying that suddenly announcing real concerns about overheating might provoke an adverse response, particularly if things started cooling off by themselves. Avent explains:

Greenspan’s quotes are taken somewhat out of context. His comment is made, specifically, in the context of the phrasing of the Fed’s statement. Several presidents have remarked that the balance of threats to the economy is unpredictable, and the motion has been made that the statement change to reflect a balance of concern between upside (inflation) and downside risks, where before inflation was less of a concern than lingering economic weakness. And Greenspan is saying that with increased transparency, the Fed needs to be more careful about the language it uses lest it give markets whiplash by appearing to veer from one fear to another. Put more simply, if the language were to be changed in the March meeting and subsequent data revealed growth to be more of a worry than inflation (or something else) then the subsequent reversal would not generate a lot of confidence.

So the comment relates to the Fed’s public statements on monetary policy, which are as carefully worded as marriage proposals. Greenspan’s quote in isolation sounds horrible, but makes a bit of sense with more context. (Whether the Fed should be engaging in such elaborate minimalist kabuki in the first place? An entirely different question.) The misunderstanding and misreading of the rent ratio chart — where some of the country’s great economic minds sat around, bickering about what a chart of a basic macroeconomic statistic should look like and missing a bubble right in front of their faces — struck me as the more frightening part of the transcript.

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