Monday, January 23, 2012

Why the Fed Slept

Why the Fed Slept

Samuelson's been on a roll with a series of concise columns on the economy. Above on Why the Fed Slept in face of the Housing crisis, and below, the affliction so common to the Knowledge Class: assumptions shoot them in the ass.
But they -- and most private economists -- didn't draw the proper conclusions. Hardly anyone asked whether lax mortgage lending would trigger a broad financial crisis, because America had not experienced a broad financial crisis since the Great Depression. A true financial crisis differs from falling stock prices, which are common. A financial crisis involves the failure of banks or other institutions, panic in many markets and a pervasive loss of wealth and confidence.
Such a crisis was not within the personal experience of members of the FOMC -- or anyone. Nor was it part of mainstream economic thinking. Because it hadn't happened in decades, it was assumed that it couldn't happen.

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