Federal Reserve warned of looming housing bubble and its probable economic impact as early as 2004, chose to do nothing

As early as March of 2004 top Federal Reserve officials debated whether there was a housing bubble and what to do about it. Then Chairman Alan Greenspan argued that dissent should be kept secret so that the Fed wouldn't lose control of the debate to people less well-informed than themselves.

"We run the risk, by laying out the pros and cons of a particular argument, of inducing people to join in on the debate, and in this regard it is possible to lose control of a process that only we fully understand," Greenspan said, according to the transcripts of a March 2004 meeting.

Atlanta Federal Reserve bank president Jack Guynn warned that "a number of folks are expressing growing concern about potential overbuilding and worrisome speculation in the real estate markets, especially in Florida. Entire condo projects and upscale residential lots are being pre-sold before any construction, with buyers freely admitting that they have no intention of occupying the units or building on the land but rather are counting on 'flipping' the properties, selling them quickly at higher prices."

"The substantial run-up in house prices, which we have followed in Florida and also see in the populous Northeast and West Coast of the United States, may be at least partially attributable to unusually low mortgage rates influenced by our very accommodative policy," Guynn warned.

But Guynn's comments were kept secret until April 30^th 2010, when the Federal Reserve finally released transcripts of Federal Open Market Committee meetings for 2004. When the Fed had previously released minutes of the meeting, the bank downplayed Guynn's concerns. The committee meeting transcripts from 2005 to present are still secret.

Cathy Minehan, the Boston Federal Reserve Bank president, also voiced concerns. "New England's rate of inflation, as measured by the Boston CPI, is rising much faster than the nation's, largely because of a 6.3 percent increase in shelter costs versus a year ago. The high price of housing worries many in the region who find that hiring the skilled workers they need in health care, for example, is made even more difficult by high housing costs," she said. While conceding that raising interest rates could come with its own risks, she argued: "I think the costs to us in terms of credibility would be greater if the situation got out of hand on the upside."

Even Tim Geithner, then president of the New York Fed, raised concerns. "The issue has been raised by Federal Open Market Committee Vice Chairman Geithner and others that our current policy stance may contribute to potential financial imbalances down the road according to the transcript.

Three months later, participants at the June meeting were still concerned. Stephen Oliner, the Fed's associate research director, showed the committee a chart of the growing disparity between home and rent prices, the most obvious indication of a housing bubble.

Had Atlanta Federal Reserve bank president Guynn's warnings been heeded and the housing market cooled, the financial collapse of 2008 may well have been avoided.