Morning Must-Read: Stephen Golub et al.: The Federal Reserve in the Run-Up to the Global Crisis

Stephen Golub et al: The Federal Reserve in the run-up to the Global Crisis: “Both Greenspan and Bernanke subscribed to Bernanke and Gertler’s (2001) view…

…that identifying bubbles is very difficult, pre-emptive bursting may be harmful, and that central banks could limit the fallout from systemic financial disturbances through ex post interventions. The successful response to the 2001 dot-com bubble boosted the Fed’s confidence in this strategy. On this basis, Blinder and Reis (2005: 73) conclude ‘[Greenspan’s] legacy … is the strategy of mopping up after bubbles rather than trying to pop them’. The 2001 crisis, however, did not feature leverage and securitisation, unlike in 2008…. Several of the Fed’s institutional routines likely reinforced its complacency. One such feature is the scripted nature of FOMC meetings…. Moreover, the priority on reaching consensus on interest-rate policy limits scope for sustained consideration of broader economic concerns. Further, FOMC staff briefings and FOMC discussions centre on the staff’s ‘Greenbook’ economic analyses and projections, which reinforces the tendency for consensus. Former Governor Meyer jokingly refers to the Greenbook as ‘the thirteenth member of the FOMC’…