Today the Federal Reserve of the US released transcripts of 2006 meetings. The financial press, always avid for filler and faux outrage, pounced on them. How is it possible that the almighty Fed didn’t see the 2008 recession coming?
The transcripts of the Fed’s Open Market Committee meetings in 2006, released after a standard five-year delay, suggest that some of the nation’s pre-eminent economic policy makers did not fully understand the basic mechanics of the economy that they were charged with supervising. The problem was not a lack of information; it was a lack of comprehension, born in part of their deep confidence in models that turned out to be broken.
“It’s embarrassing for the Fed,” said Justin Wolfers, an economics professor at the University of Pennsylvania. “You see an awareness that the housing market is starting to crumble, and you see a lack of awareness of the connection between the housing market and financial markets.”
“It’s also embarrassing for economics,” he continued. “My strong guess is that if we had a transcript of any other economist, there would be at least as much fodder.”
Little Alarm Shown at Fed At Dawn of Housing Bust and
Governor Cautioned Fed About Mortgages. From the latter:
History may show that Susan Bies’s concerns didn’t get enough attention at Federal Reserve policy meetings in 2006.