Very soon, ice accumulation began to interfere with the speed
sensors. An inauspicious aroma seeped into the cockpit. The pilots reacted with a bizarre combination of hasty
actions and lazy thinking. When the plane had stalled, the pilots ignored the loud stall alarms. Their
reaction -- to pull back on the stick -- was the exact opposite of what they
were supposed to do in the situation. They assumed the plane's
computer would prevent them from making a catastrophic mistake. But they failed to see that the computer had switched into an alternative mode that made it
easier for them to stall the aircraft 30,000 feet above the ocean.
As the pilots pushed the plane's nose higher and higher in the sky,
the plane did stall -- and fall. But none of pilots
ever used the word "stall" in the transcript, including the captain, who returned in time to stop the crash, but failed. Nobody even diagnosed the problem until precisely
2:13 AM and 42 seconds in the black box log. It was too late. Forty-eight seconds later, AF447 and all 228
passengers hit the ocean.
And so, a highly advanced cockpit stocked with highly trained professions
failed to avoid an utterly avoidable tragedy because of a mix of
confusing conditions, overconfidence, and human error. I hope that, by
laying out their circumstances so broadly, you'll understand where I see
the parallels with the 2006 Fed meeting.
On January 31, 2006, a group of economic luminaries, including Alan Greenspan and Tim Geithner, gathered around a long ovular table in the offices of the Board of Governors of the Federal Reserve in Washington, D.C., to discuss the economy and send off Greenspan, the captain of the Fed.
At the time, warning signs abounded. The U.S. economy had already begun the epic free fall that would lead to
recession in late 2007, cataclysm in late 2008, and 10%
unemployment by 2010. The housing boom was mid-bust, with home ownership peaking at 69.2 percent in late 2004. (It has since fallen to below 60%, if you include delinquent mortgage borrowers.) Just days before the Fed meeting, the country had learned that GDP growth in the fourth quarter of 2005 had slowed to 1.1%, led by a nasty decline in consumer spending.
Still, practically all the participants said full-speed ahead. Even Janet Yellen, who did express some concerns about the housing market, told the departing Greenspan "that the situation you're handing off to your
successor is a lot like a tennis racquet with a gigantic sweet spot." Eleven months later, after total national income had already begun shrinking, Tim Geithner, then president of the Federal Reserve Bank of New York, told his colleagues: "We think the fundamentals of the expansion going forward still look good."
Mistakes directly leading to the deaths of 200 passengers are a very different beast than mistaken economic forecasts, which (as part of a group of culprits including Wall Street greed, regulator incompetence, and home-buyers' ignorance) indirectly led to a great and devastating recession. But like the pilots, the Fed's failure was not a matter of education or training. These were among our greatest economic thinkers. Quite like the pilots, they trusted the mechanics of a complex system they did not fully understand, especially the connection between the housing and financial markets. Amazingly, in retrospect, they often emphasized inflation concerns over housing concerns and the health of Wall Street. ("Markets are now so much more developed and sophisticated that maybe it's different this time," Dino Kos told Greenspan.)