Interesting new research from an eclectic group from
Swarthmore College:
Stephen Golub, Ayse
Kaya & Michael Reay (2014): What were they thinking? The Federal Reserve in
the run-up to the 2008 financial crisis, Review of International Political
Economy
What were they thinking? The Federal Reserve in the run-up to the 2008
financial crisis
by Stephen Golub, Ayse Kaya and Michael Reay
Review of International Political
Economy, July 2014
Abstract
The Federal Reserve
(the Fed) is responsible for monitoring, analyzing and ultimately stabilizing
US financial markets. It also has unrivalled access to economic data,
high-level connections to financial institutions, and a large staff of
professionally trained economists. Why then was it apparently unconcerned by
the financial developments that are now widely recognized to have caused the
2008 financial crisis? Using a wide range of Fed documents from the pre-crisis
period, particularly the transcripts of meetings of the Federal Open Market
Committee (FOMC), this paper shows that Fed policymakers and staff were aware
of relevant developments in financial markets, but paid infrequent attention to
them and disregarded significant systemic threats. Drawing on literatures in
economics, political science and sociology, the paper then demonstrates that
the Fed's intellectual paradigm in the years before the crisis focused on ‘post
hoc interventionism’ – the institution's ability to limit the fallout should a
systemic disturbance arise. Further, the paper argues that institutional
routines played a crucial role in maintaining this paradigm and in contributing
to the Fed's inadequate attention to the warning signals in the pre-crisis
period.