Fed Up

Federal Open Markets Committee Was Clueless to Financial Crisis

Recently released transcripts from a September 2008 meeting say Fed officials spoke more about inflation than the impending (and obvious) recession. Say what?!

02.24.14 10:45 AM ET

If you didn’t read through the Federal Open Markets Committee transcripts released last week, I beg you to go take at least a cursory look. Unless you have a weak heart.

Mine, I can tell you, almost shot right out of my chest when I read these passages in Binyamin Applebaum’s New York Times write-up on Saturday morning:

As Fed officials gathered on Sept. 16 [2008] at their marble headquarters in Washington for a previously scheduled meeting, stock markets were in free fall. Housing prices had been collapsing for two years, and unemployment was climbing.

Yet most officials did not see clear evidence of a broad crisis. They expected the economy to grow slowly in 2008 and then more quickly in 2009.

The transcript for that meeting contains 129 mentions of “inflation” and five of “recession.”

What?! On September 16, 2008, they didn’t see “clear evidence of a broad crisis”? Remember what happened on September 15? Lehman Brothers went under. The Dow was in free-fall. I don’t recall there being much doubt by the evening of the 15th that we were in a major crisis and at serious risk of a global financial meltdown of unprecedented scale. After all, it was that very day that candidate Barack Obama called the meltdown “the most serious financial crisis since the Great Depression.” And it’s not that he was demonstrating some kind of special acumen. It was obvious. This was also the same day that candidate John McCain issued the widely mocked and instantly infamous statement that “the fundamentals of our economy are still strong.”

If you’re still not convinced, here was the front page of the Times for the next day. You had a four-column (out of six), all caps, double-deck headline reading: “WALL ST. IN WORST LOSS SINCE ’01 DESPITE REASSURANCES BY BUSH.” The lead story noted that the Dow dropped 4.4 percent. There was one of those little boxes billing a number of other inside stories. That is a long way from being your normal news day.

And the FOMC—the 12 people who run our economy for us, the people whose names 99 percent of us don’t even know but have more power than any politician except the president—thought it wasn’t a crisis? And they were really 26 times more worried about inflation than recession? And they really, as the Times characterized it, still thought the economy was growing; still predicted that it would continue to grow, albeit at a slower rate, for the rest of 2008, and then more quickly in 2009. So the sentiment for which McCain was widely mocked for expressing publicly—the people who run our economy were in essence expressing that view privately!

I don’t think I’ve read a more shocking few sentences in a newspaper in decades. Who are these people, and what in God’s name is their reality? I’m no expert on high finance. I was about to apologize for that, but why should I, when the people who were the experts were so clueless? (Not everyone was awful; Janet Yellen, the new Fed chair, actually comes off best—you know, the same Yellen the Republicans almost blocked because she was allegedly unqualified.)

There is in fact a really serious lesson here about the nature of expertise and the insularity of our major institutions, financial and otherwise. As we all know, you don’t get to the top of any organization or system by rocking the boat or expressing opinions directly at odds with the prevailing conventional wisdom one hears around the water coolers. Playing it safe is how you advance in big institutions. The Fed has been heavily criticized in recent years for being far more preoccupied with inflation fighting than job creation, and so it stands to reason that people who adopted that line became leading Fed officials.

But this is even worse. There’s a tipping point in some institutions at which expertise is actually corrupting. Conservatives should be, I would think, sympathetic to this argument in general. It was William F. Buckley who famously said around a half-century ago that he’d “rather be governed by the first 2,000 names in the Boston telephone directory than by the faculty of Harvard.” That was a classic dig at pointy-headed liberal elitism, and the American right has imbibed the world view in a big way ever since.

Well, I can tell you this without reservation. After reading these transcripts, I’d much rather the invisible hand of Adam Smith’s ghost had gone out onto Constitution Avenue and asked 12 random Washingtonians to sit around that big wooden table in the Fed’s headquarters that Sept. 16. I think there’s little doubt that these 12 citizens (unless Smith’s ghost had had the bad luck of plucking out a dyed-in-the-wool right-winger) would have damn well seen the urgency of the situation and been more worried about recession than inflation.

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Buckley identified what may have been a legitimate problem in the mid-1960s. But today we suffer from precisely the opposite problem. We’re cursed by conservative pointy-headed, out-of-touch elitism—at the Fed, on Wall Street, on the boards of our major corporations, and in the mostly captured regulatory agencies that are supposed to oversee these institutions. They’re run by people who are staggeringly well-credentialed but who live so deep inside the box of corporate/financial ideology that they can’t even see the worst crisis in 80 years when it hits.

Things can be done. Corporate boards can be restructured to have community and worker representation. Regional Fed boards and directorates can have the same kind of representation. Or maybe regional Fed presidents should be removed from the FOMC entirely. Matthew Yglesias reviewed some of these options for my journal, Democracy, in a fascinating 2011 article.

But in reality, nothing that makes the financial sector accountable in any really serious way to people outside the world of high finance will ever happen. That, you see, would be Marxist or something. The irony is that a little of this so-called Marxism is exactly what could have saved capitalism (and not for the first time). At least thank the gods that the one who saw reality most clearly is the new chair.