Fed Members Laughed As Housing Bubble Grew

It was good times at the Federal Reserve five years ago: Low interest rates instituted by then-Fed Chief Alan Greenspan had housing prices booming, the stock market was rising and Fed members were—literally—laughing their way to the...well, central bank.

Alan Greenspan
Alan Greenspan

History shows they may have been laughing a bit too hard.

In what may be the strangest market indicator ever, a blogger found that the amount of laughter recorded in the official transcripts of Federal Reserve Open Market Committee meetings from 2000 to 2006 correlates almost perfectly with the rise in housing prices taking place at the time.

A particular series of side-splitting meetings by the central bank in 2006 marked the very top of the housing bubble.

The blog, The Daily Stag Hunt, tracked the times “laughter” was recorded by the Fed’s stenographer during the FOMC meetings. In 2001, the FOMC averaged 16.5 moments of guffaws per meeting. In 2006, there were, on average, 44 outbreaks of laughter.

As found by the blogger, one of the more TV sitcom-like moments came during the Fed’s January 2006 meeting when then-Vice Chairman Tim Geithner said to the departing Greenspan during his last gathering:

“I’d like the record to show that I think you’re pretty terrific, too. [Laughter] And thinking in terms of probabilities, I think the risk that we decide in the future that you’re even better than we think is higher than the alternative.[Laughter] With that, the economy looks pretty good to us, perhaps a bit better than it did at the last meeting. With the near-term monetary policy path that’s now priced into the markets, we think the economy is likely to grow slightly above trend in ’06 and close to trend in ’07.”

But soon after that exchange, the laughter died.


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Housing prices crashed, derivative securities tied to them plummeted in value, and the biggest financial crisis since The Great Depression for this country ensued. It seems the same euphoria and complacency that marked the housing bubble on Wall Street and Main Street, was reflected in a comfortable and cheery atmosphere in meetings of the Federal Reserve.

At the most dire point of the crisis, home prices fell almost 20 percent year-over-year one month, according to the S&P/Case-Shiller Home Price Index. After a rebound in 2010, home prices are on the slide again, even with Fed Chairman Ben Bernanke following his predecessor’s remedy of low interest rates.

The Case-Shiller Index for November, set for release Tuesday, is expected to show home prices continued to fall, with Shiller’s 20-City Composite Index to drop more than 3 percent, estimates Zillow.

That means the laughter count is probably pretty low in Fed meetings these days.

But we don’t know for sure because while the FOMC meeting minutes are released three weeks later, full transcripts of the meetings that record these moments of brevity are not released until five years later.

So for those who would like to use the laughter indicator to time the housing market, you’ll have no such luck.

The bigger lesson from this humorous research however, may be that transparency from the Fed, which Bernanke has taken steps to increase, is still not to the point where it should be.

“Group-think dominated the FOMC meetings and Sir Alan, as we pointed out so often, was completely wrong about the potential negative effects of derivatives,” wrote Alan Newman, who nicknamed the bloggers findings “The Laughter Index” in his Crosscurrents newsletter to clients this week. “We can never know within a reasonable period of time if the FOMC actually knows what it is doing. We are not laughing.”

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