Fed Laughs Peaked in June 2007 Before Crisis Hit

Federal Reserve policy makers deliberating how to safeguard the world’s largest economy as it neared the worst financial crisis in seven decades weren’t averse to sharing a few laughs. Their levity didn’t last.

Humor at 2007 meetings centered on coffee breaks, basketball rivalries and drug testing, according to transcripts released yesterday which highlight collegiality among policy makers debating the economic outlook and financial markets.

Ben S. Bernanke got the first laugh of 2007 on Jan. 30 after Donald Kohn, then vice chairman of the board, nominated him to continue serving as Federal Open Market Committee chairman. “Thank you,” Bernanke said, turning to his colleagues to ask: “Objections?”

FOMC merriment bubbled over into 66 outbreaks of laughter that month and peaked that June in 81 instances, transcripts show. Then, as the full magnitude of the subprime mortgage crisis hit home, references to laughter in August fell to 40. By December, the start of an 18-month recession, the FOMC was showing signs of a humor deficit, laughing just 22 times. Committee members that month mentioned recession 27 times.

FOMC participants in 2007 used jokes to underscore a point.

In June 2007, as subprime mortgage markets showed increasing indications of weakness and the outlook for U.S. homebuilders darkened, Dallas Fed President Richard Fisher said, “I only half-jokingly recommended that they take all sharp objects off their desks and seal their windows.”

Fisher provoked laughs again in October 2007 after citing a newspaper story reporting that companies stopped buying securities they don’t understand.

‘Lala Land’

“Investors are coming home from lala land,” he said. “If you will forgive me, you might say we have gone from the ridiculous to the subprime.”

“Let the transcript say ‘Groan,’” Richmond Fed President Jeffrey Lacker said.

Fisher hasn’t refrained from peppering his public speeches with quips and anecdotes. In a 2008 address he shared the name of the breeding bull at his Texas ranch: “Irrational Exuberance.” In a December speech, he disclosed the name of another one of his livestock: “Too Big to Fail.”

FOMC drollery may reflect what Fisher said is the amity among committee participants who leave meetings with cool tempers even after expressing divergent views on front-burner issues such as inflation.

“Unlike Congress, we all like each other afterwards,” Fisher said in a Jan. 17 Bloomberg News interview, describing how he disagreed with the FOMC decision last month to expand a bond-purchase program and link policy to economic indicators. “We all are very honest with each other.”

Avoid Recession

In December 2007, before the National Bureau of Economic Research had determined a recession had begun, David Stockton, the Fed board’s head of research and statistics, said central bank economists believed the U.S. would avoid a contraction.

“Our forecast could admittedly be read as still painting a pretty benign picture,” Stockton said, according to the transcripts. “So I tried not to take it personally when I received a notice the other day that the Board had approved more-frequent drug-testing for certain members of the senior staff, myself included.”

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