Why the Fed missed the crisis

Robert J. Samuelson

The Washington Post

Why didn’t the Fed see the financial crisis coming? asked Robert J. Samuelson. A “media frenzy’’ erupted last week when minutes of a 2006 Federal Reserve meeting showed the officials unaware that a giant housing bust would soon trigger the worst recession since the Depression. “The Fed slept’’ for a simple reason: Its own policies helped create the bust.

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In recent decades, the thrust of economic policymaking “has been to smooth business cycles.” That’s brought us shortened recessions and long periods of prosperity—but it’s also made banks, businesses, and consumers feel safe enough to take foolish risks. In the 1960s, economic policy led to a decade-​long boom—but then to a bust that lasted until the 1980s. A second boom roughly tracked with Alan Greenspan’s tenure as Fed chairman from 1987 to 2006; “we are now in the bust.” Greenspan’s success in sustaining prosperity—for which he “was lionized’’—blinded the Fed to the consequences.

In the future, we may need to sacrifice long booms to “muffle subsequent busts.” Alas, that’s a lesson neither politicians nor economists want to hear.