Let's get the cliche out of the way right away: Hindsight is 20/20.


The Fed has released the transcripts of its Open Market Committee meetings from 2006.

 I haven't read them all, but I've parachuted into enough of them to be dumbstruck by how certain Ben Bernanke and crew were that the housing slowdown would be manageable and not have much of an impact on the economy. This placidity came despite warnings from the CEOs of major homebuilders that order cancellations were piling up at a previously unseen pace.

Here's one quote, in August 2006, that captures the general feeling. It came from Susan Bies, a Federal Reserve Board Governor who resigned in 2008:

"..., the rapid escalation of home sale cancellations clearly has been very surprising. Again, the gross sales figures don’t show this, but the information we’ve got on the cancellations indicates a much more pronounced slowdown than we might have expected. In looking through other housing cycles and in talking to bankers and lenders, one of the good things I find is that the industry learned in the 1980s. Because those in the industry are more sophisticated in the way they manage their land costs and their inventory, I think the length of the cycle is unlikely to be as long. In the 1980s, bankers made plenty of funds available for companies to continue to develop land and to put in infrastructure. When the housing bubble
burst, all of a sudden we had unsold housing units. ...  This time we don’t have the unfinished inventory of developments that we had in the ’80s. So I think that the cycle is likely to be much shorter than it was then and that it will put some firmness in that market.

She was not alone in that sentiment.