Fed Only Interested in Inflation—Ever

Ben BernankeAs you’ve probably heard, the 2008 transcripts of the Federal Reserve Open Market Committee (FOMC) were released last week. They allow us to see for the first time what all the Big Thinkers thought about the financial crisis and housing bubble in real time. And the picture is not pretty. It is also not surprising. As always, most of the people on the FOMC were primarily interested in inflation, even as the economy was in free fall.

I think it is best to think of the Fed in sociological terms. All the people on the board are members of the power elite. They never have to worry about losing their standard of living. But even more important, they don’t have any friends who have to worry about theirs either. As long as the Fed members keep inflation low, they will always be welcome at the parties of the power elite. Unemployment is something that only affects the commoners. The power elite only cares about it in as much as a very high unemployment rate would hurt profits and possibly start a revolution. So the Fed pretty much only cares about inflation, regardless of its mandate to keep unemployment low.

The reason that the financial crisis was so damaging to the economy is that it brought on the bursting of the housing bubble. But apparently, few at the Federal Reserve were aware of this. MarcusCMarcellus put together this video of clips from the years leading up to the crisis in which Ben Bernanke repeatedly claimed that there was no housing bubble:

But as Dean Baker points out, even as the housing crisis was upon us, the Fed was mostly ignorant:

The other item that is amazing in these transcripts is that no one seems to know about the Census Bureau’s data on housing vacancies. Vacancy rates of ownership units were already about 50 percent above normal levels by the end of 2007. The vacancy rate on rental units was about 30 percent above normal levels. What did the Fed folks think this implied for house prices?

Incredibly, the first mention of vacancy rates in the transcripts doesn’t come until June.

This is like watching storm clouds gathering and ignoring them. But it is important to remember what’s really going on. The storm clouds were gathering, but not for the power elite. So the safest thing for the Fed to do was to ignore the signs that thing were getting bad for the working class and concentrate on making sure that nothing would harm the wealth of the elites. And history bears this out. What is much more surprising is that people like Janet Yellen and Eric Rosengren had any interest in what was best for the economy overall.

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About Frank Moraes

Frank Moraes is a freelance writer and editor online and in print. He is educated as a scientist with a PhD in Atmospheric Physics. He has worked in climate science, remote sensing, throughout the computer industry, and as a college physics instructor. Find out more at About Frank Moraes.

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