Saturday, February 22, 2014
The Federal Reserve Misread The Seriousness Of The Financial Crisis
New documents were released which provide insights into the deliberations at the Fed at the onset of the financial crisis. Many at the Fed were more concerned about inflation, which has been its primary focus, than they were about recession. The economic indicators that they relied upon failed to inform them about the dynamics that were underway in the economy. More over, the standard economic model that most central banks use to forecast economic activity did not include changes that were underway in the financial system. The credit system is regarded as external to the real economy in those models. Curiously, those at the Fed who believed that the economy was on its way to recovery, have also been most resistant to the aggressive monetary policies pursued by the Fed for the last five years. Janet Yellen, who replaced Ben Bernanke as chairperson of the Fed, was one of the few exceptions along with the chairmen of the Boston Fed and the Atlanta Fed.