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No Laughing Matter: Fed Laughed As Bubble Burst

Whether it’s their remarkable ability to justify the creation of asset bubbles by claiming they are “smoothing out the business cycle” or something more subtle, like getting the day of the week wrong on an official conference call transcript, it’s hard not to chuckle at the Fed. 

At the end of the day though, it’s important to remember that even as they transform modern markets into laboratories and market participants into guinea pigs in the name of figuring out whether high-minded economic theory works when applied to the real world, central bankers are people too, and it’s nice to know that every so often, they get a chance to have a little fun.  

When we parsed the newly released 2009 Fed transcripts yesterday we were too busy looking to uncover things like a previously unreported plan to create a bad bank to look for signs of central planner levity, but fortunately, the research department at Bloomberg was looking for the important stuff. Thanks to their efforts we have the official Fed Chuckle Count for 2009 which, based on the graph below came in at 39.7 — there was oddly no word on what economists polled by Bloomberg were expecting. 

Breaking this down, it’s important to note that recorded incidences of laughter at FOMC meetings hit their highest level on record in July 2007, which coincides exactly with the moment when the housing bubble finally burst (remember: they weren’t laughing at you, they were laughing with you). Here’s a quick rundown of exactly what was going on at “peak chuckle”: 

On July 10, around four months after it warned on the market initially, Moody’s downgraded 399 bonds backed by subprime mortgages which together totaled some $5.2 billion. Meanwhile, S&P suggested it was close to cutting ratings on more than $12 billion in mortgage-backed securities due to declining home prices and rising default rates. On July 12, Fitch Ratings placed 19 structured collateralized debt obligations on Ratings Watch Negative due to a significant deterioration in the underlying portfolios of residential mortgage-backed securities. That same day, S&P cut its ratings on 498 subprime mortgage related bonds worth some $6.39 billion.

 What followed for the Fed was a dramatic decline in spontaneous outbursts of laughter in the halls of the Eccles Building which lasted until March of 2009 the very month that the Fed abandoned the bank aggregator (bad bank) plan and decided instead to launch QE. You cannot make this stuff up. 

Here are some highlights from 2009 via Bloomberg: 

January — Cleveland Fed President Sandra Pianalto, on the general public's desire to get policy in order: "Our discussion yesterday about what the effect is of a $250 billion purchase of MBS or a $250 billion purchase of longer-term Treasury securities demonstrates that we just do not have certainty around the effects of those actions. Before this crisis began, the public had a fairly good grasp of our policy rule. Now they are trying to find the new rule, and I hope they do not find one before we figure out exactly what it is."


August — Richmond Fed President Jeffrey Lacker, on the FOMC's own confusion: "President Plosser and I discussed output gaps with Mr. Kiley at the June meeting. That conversation may have seemed a bit confusing. It was [confusing] when I read the transcript."


April — Chief Economist David Stockton, on his early introduction to green shoots: "While in high school, I had a brief job with a lawn service. One day while I was riding my tractor, a woman came running out her back door gesticulating wildly. It turns out that the patch of unruly weeds I had just mowed down were, in fact, the green shoots of her emerging asparagus garden. Two weeks later, I was working in a local slaughterhouse. That life lesson taught me that an inability to distinguish the green shoots from the weeds can have unpleasant consequences for one’s career path."