Editor's Note: Morning Scan will not publish on Monday, Jan. 16 in observance of the Martin Luther King holiday. We’ll be back on Tuesday, Jan. 17.

Receiving Wide Coverage ...

Clueless: For all their power, pedigrees and Wall Street connections, senior Federal Reserve officials were as out to lunch about the state of the economy and housing market in 2006 as a roomful of polyester-clad Miami Beach condo flippers. That's the takeaway from Thursday's release, five years after the fact, of meeting transcripts from the Federal Open Market Committee.

The FOMC, which consists of the governors of the Federal Reserve and the presidents of the 12 regional banks, began the year with warm-and-fuzzy feelings about the economy and departing Fed chairman Alan Greenspan. A "monetary policy Yoda," is how then Fed vice chairman Roger Ferguson described his retiring boss, according to the Washington Post quip from the transcript.

As the year progressed the FOMC gave little credence to the possibility that a faltering housing market would weigh on the broader economy. Even as the nation hurtled toward its greatest financial catastrophe in three generations, the committee was fretting instead that the economy would grow so fast as to kick up inflation, the New York Times reports.

In the year before the bust, top central bank officials made light of a builder offering Mini Cooper cars to homebuyers as signing bonuses and efforts to make empty homes look occupied. Overall, the Committee was startlingly sanguine.

"We think the fundamentals of the expansion going forward still look good," Timothy Geithner, then president of the Federal Reserve Bank of New York, told colleagues in Washington in December 2006.

Benjamin Bernanke was equally at ease early in the year. To make certain it get its point across, the Wall Street Journal graphs the S&P/Case Shiller housing index on page one of its Friday edition and pins a quote from Bernanke to its March, 2006 peak. Sayeth Ben: "Again, I think we are unlikely to see growth being derailed by the housing market." We bet that's one he wishes he could take back.

In what takes the cake in this bakeoff among myopic economic pontificators is a doozie from Fed governor Susan Bies. "I really believe that the drop in housing is actually on net going to make liquidity available for other sectors rather than being a drain going forward, and that will also get the growth rate more positive," she told colleagues in June 2006. For reporting on the transcripts, our Understatement of the Day award goes the Times for declaring that "The results are unlikely to burnish any of their [FOMC members'] reputations, inasmuch as they could not see the widening cracks beneath their feet."

"It's embarrassing for the Fed," Justin Wolfers, an economics professor at the University of Pennsylvania tells the Times. "You see an awareness that the housing market is starting to crumble, and you see a lack of awareness of the connection between the housing market and financial markets."

Yes, there is vicarious pleasure to be had snickering at the folly of the high-and-mighty here. But the FOMC's lack of insight carries a serious message for the future, too.

It is that our economic overseers appear to have learned nothing from their folly and are instead intent on repeating their mistakes. This time, they're doing so by putting faith in the Financial Stability Oversight Council and Office of Financial Research, which together are broadly charged with conjuring up the sort of economic crystal ball and early warning systems that the FOMC, for all its resources, utterly lacked.

If only our government were truly populated with wise men and women, it would instead listen to those great market philosophers Dirty Harry-"A man's got to know his limitations"-and John C. Bogle, Vanguard Group's founder. Bogle, for one, would give them an earful about what a fool's mission they're on trying to out-guess the economy and markets and how the truly enlightened focus instead on preparing to ride out their inevitably unknowable gyrations. New York Times, Washington Post, Wall Street Journal

Banking Gets Better (Sort of): JPMorgan Chase & Co. on Friday morning reported record earnings for 2011 and a fourth-quarter profit decline of 23%. The results matched analysts' estimates and mirrored industrywide gains in lending, according to Bloomberg. JPMorgan's results are hardly anything to cheer about, but more broadly investors are showing that after an annus horribilis for bank stocks in 2011, this year is so far shaping up to be less bad. At least for now, the Euro-crisis is on the back burner and at home murmurs about additional government support for housing is giving the sector a lift, the Journal reports. On top of that, consumer loan demand has been strong and the job market is on the mend. Where there's still plenty of room for gloom is on the investment banking side of the business. There, the cuts keep on coming. Royal Bank of Scotland became one of the latest to whack away, announcing earlier this week plans to let go of 3,500 i-banking workers.

Wall Street Journal

Psst, wanna buy a subprime mortgage? Goldman Sachs has reportedly offered to take a multi-billion dollar package of subprime bonds off the hands of the Federal Reserve Bank of New York. Curiously, the bid to buy the bonds by what is widely regarded as one of Wall Street's savviest players "rattled the market," according to the Journal. Yes, the debt market likes buyers. No, it does not like the prospect of a flood of fresh supply.

Financial Times

Some dozen-plus state attorneys general met this week to share litigation strategies and investigative findings from their mortgage-related probes into leading US banks. That's according to a Financial Times piece quoting "people familiar with the matter." [Editor's note: That state AGs are a talkative and politically ambitious bunch does not qualify as a scoop]. The 10 or so AGs on hand, along with officials from other states, are said to have expressed general discontent with a proposed $25 billion settlement with leading banks over mortgage sins perpetrated and/or imagined. Also discussed were ways the aspiring governors, er, attorneys generals, could pool resources for future mortgage-related investigations and lawsuits, indicating that this legal drama series has many more episodes to come.

New York Times

Here's a steamy story about how to get work inside storied Wall Street firm Goldman Sachs. Kenny Lao has done so by parking his Rickshaw Dumpling Bar in front of Goldie's downtown offices. Lao's steamy buns are so popular with employees that the company invited him to sell them in its 11th-floor cafeteria—a space Lao describes as looking like Gattaca from a 1997 sci-fi film. That's just the sort of digs we would expect for these masters of the universe.

Correction

The email version of Thursday’s Scan misspelled the name of The Economist’s “Schumpeter” column. It’s named after Joseph Schumpeter, the economist who popularized the term “creative destruction.” Obviously, we were confusing him with Joseph Shumpeter, who comes from the same line of well-known Dutch authors as Charles Dikkens.

 

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