Blue Point Trading - In 2008 the Fed was lost, what about today?

In 2008 the Fed was lost, what about today? After a five-year wait, the central bank released the records of a total of 14 meetings from 2008. During the 2008 financial crisis, the US Federal Reserve struggled to grasp the scope of the problem and how to adequately respond, the transcripts reveal. The transcripts offer the clearest insights yet into the central bank’s thinking during the crisis.

After reading several articles, the following are notable quotes and opinions on this subject:

[li]“Frankly, I am decidedly confused and very muddled” said former chair Ben Bernanke during a September meeting.
[/li][li]Mr Bernanke worried about the “ad hoc” nature of deciding who to bail out …
[/li][li]“I should say that this comes as a surprise to me,” Bernanke said. “I very much expected that we could stay at 2 percent for a long time, and then when the economy began to recover, we could begin to normalize interest rates. But clearly things have gone off in a direction that is quite worrisome.”
[/li][li]Janet Yellen “I am very concerned about downside risks to the real economy…” Oh really…
[/li][li]“It is becoming abundantly clear that we are in the midst of a serious global meltdown,” Yellen said.
[/li][li]Mr Bernanke said, “I think that our policy is looking actually pretty good,” indicating he thought that a move by the central bank earlier in 2008 to trim interest rates had stemmed the tide of the crisis.
[/li][li]After a meeting that concluded with the central bank keeping its benchmark interest rate at 2%, just two days later, Mr Bernanke and Treasury Secretary Henry Paulson were forced to speak to members of Congress, advising them to agree to a bailout of the banking system.

The hundreds of pages of transcripts underscore the difficulty of coping with the financial crisis and the Fed’s scramble to react to events like the collapse of Bear Sterns in March of 2008. The documents paint a picture of the Fed that shows that it worried perhaps more than it should about inflation risks, and failed to grasp initially the full impact of the housing market crisis. Overall in September 2008 on the cusp of the crisis, transcripts indicate that most members of the Fed thought the crisis was contained. Of course the events later, proved them to be wrong.

I have spent two years of my life working for a central bank, the ECB. There is a culture that seems to permeate organizations like this. I call it “group think.” You can find this in a private organizations too, but it is particularly special at central banks. There seems to be a mime that is stated, and then every one just/must follows and does not even think about what they are actually doing.

On one project I was working on, the macro-economics projections database, it was clear that the data being collected was wrong or at least miss-leading. But the data was supposedly actually used to make interest rate decisions by the board members – unbelievable. The reality is that they were not really using it, the board members were just operating on their gut intuitions and “group think.” The database was just their to show that they were doing all the detailed analysis, regardless if it made any sense.

The point here is that, when we think the central banks are all under control and making very dutiful informed decisions, it simply is far from the case. These transcripts from 2008 show this. Central banks are very reactive and often make the wrong decisions. Some even feel that in fact, they are the causes of all the bubbles and busts, we have been experiencing over the past few decades. So as the Fed ponders the current taper decisions, it will be mostly a crap shoot. Kinda scary huh?

Blue Point Trading, William Thompson