Transcripts Show Dour Fed as Crisis Grew Worse

New Fed transcripts show members did laugh about automakers' decline, homebuilder problems, baseball.

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When the economy is happy, so are Fed members. And newly released transcripts from the Federal Reserve show that in 2007, members of the Federal Open Market Committee grew increasingly sober as the economy snowballed toward crisis.

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With Friday's release of 2007's FOMC transcripts, there is evidence that in 2007, as subprime lenders filed for bankruptcy and the nation's credit markets started showing signs of trouble, members of the Fed committee that sets interest rates stopped laughing. This continues a trend first noted by bloggers at The Daily Stag Hunt, who last year found the number of times FOMC members laughed roughly correlated with the nation's housing prices from 2001 to 2006. That is, as housing prices increased, so did the incidence of laughter in transcripts from FOMC meetings.

Below is a chart showing just how much FOMC members' moods soured in 2007, in the context of the previous boom years.

Source: The Daily Stag Hunt (2000-2006); U.S. News analysis of Fed transcripts (2007)

And here's how that compares to Case-Shiller measures of home prices over the same period. In 2007, the downturn in prices became pronounced, on its way to a continued 2008 free fall.

 In addition, members laughed much less in the second half of the 2007 than in the first; on average, around 30 times per meeting in the second half, compared to 61 in the first part. A chart of their 2007 meetings shows the line generally trending down.

Of course, as far as indicators go, a record of the FOMC's guffaws is a pretty noisy data set. So, just why were they laughing so much during the June 2007 meeting? In part, there was some friendly bickering over the Yankees-Red Sox rivalry, not to mention low-grade trash-talking between districts about the NBA finals, in which the San Antonio Spurs beat the Cleveland Cavaliers.

Of course, this being the realm of monetary policy wonks, there were some economic jokes, but most of them tended toward gallows humor. Then-Chicago Fed President Michael Moskow got a laugh when he brought up the decline of Detroit's automakers:"Overall activity in the District is lagging the nation, mainly because of the continued difficulties of what we now call the Detroit Three, formerly known as the Big Three, [laughter] and their suppliers," reads this transcript excerpt.

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The humor turned even darker when Dallas Fed President Richard Fisher addressed the growing plight of homebuilders: "[San Francisco Fed] President [Janet] Yellen, I won't depress you with the soundings from the two largest public homebuilders. I only half jokingly recommended that they take all sharp objects off their desks and seal their windows. [Laughter] Their situation is reported to have gone from bad to worse."

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