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What Were They Thinking?
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What Were They Thinking?

The Federal Reserve in the Run-up to the 2008 Financial Crisis

Stephen Golub, Ayse Kaya and Michael Reay
Routledge, 2014
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Editorial Rating

9

Qualities

  • Analytical
  • Innovative
  • Eye Opening

Recommendation

With 500 top professional economists, 2,500 supervisory personnel, and an extensive network of formal and informal relationships throughout the financial sector, the Federal Reserve was in a unique position to foresee and perhaps prevent the financial crisis of 2008. So why didn’t it? Professors Stephen Golub, Ayse Kaya and Michael Reay scoured the printed records of what Fed insiders were saying behind closed doors in the years leading up to the crisis. The authors exercise their respective specializations in economics, political science and political sociology to understand why “the most powerful and prestigious economic agency in the world” didn’t see the catastrophe coming. getAbstract recommends this accessible, unsettling, eye-opening article to policy makers and Fed watchers.

Take-Aways

  • Transcripts of the Federal Reserve’s internal meetings show that, from 2004 to 2006, Fed officials seldom discussed either subprime mortgages or complex derivatives, both of which had significant roles in the 2008 financial crisis.
  • Regulators paid relatively little attention to the risks of leverage, faulty models, or securitization and other innovations.
  • The Fed was not in thrall to the financial industry or to a market philosophy. Nor did it overrely on abstract models or focus exclusively on inflation targets.

About the Authors

Stephen Golub is an economics professor at Swarthmore College, where Ayse Kaya is an assistant professor in political science and Michael Reay is an assistant professor in political sociology.

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    S. P. 9 years ago
    Shouldn't there be a minimum standard by which the FOMC reviews and then reacts to economic indicators?