Federal Reserve: Yes, We Made These Huge Mistakes in 2007

Crystal BallTop Federal Reserve policymakers believed, in the months leading up to the recession, that problems with the housing industry in 2007 were isolated and non-threatening to the U.S. economy.

New reports issued this week show U.S. Treasury Secretary Timothy Geithner, then-president of the New York Federal Reserve Bank, believed the symptoms banks were showing, such as lack of funds, were normal and that Wall Street was still doing fine.

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“We have no indication that the major, more diversified institutions are facing any funding pressure,” Geithner said according to the transcripts. “In fact, some of them report what we classically see in a context like this, which is that money is flowing to them.”

Fed Chairman Ben Bernanke had…

similar thoughts on the housing crisis, apparently unafraid of banks’ abilities to pay back debts.

“I do not expect insolvency or near insolvency among major financial institutions,” he said in December 2007.

As we now know, the crisis was actually much more serious than many had originally guessed, threatening to tear down powerhouse Wall Street firms such as Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS). That’s in addition to the firms already taking it on the chin such as Citigroup (NYSE:C) and Bank of America (NYSE:BAC).

Yet Fed Governor Kevin Warsh was one of the few who seemed to fully appreciate the severity of the issue.

“I do think that the deterioration of the financial markets since we last met has been quite remarkable and quite profound,” Warsh said in December of 2007.

The Fed has been in crisis-mode ever since, implementing a number of measures to help fight unemployment, manage inflation, and prevent financial institutions like the American Insurer Group from going under.

Don’t Miss: The Cautious Optimism of Timothy Geithner.