The minutes from the Fed meetings of 2008 are something of a gold mine for those who want to plug in the details of how the debt problems became a major calamity that spiraled almost out of control. A really good compilation is this piece from The Atlantic. It pieces together news events and the Fed minutes, starting in 2007, and shows how the majority of the Fed was worried about inflation when we were on the verge of a deflationary spiral. It’s good reading. Good title, too.
Now, the Fed actually did a good job in this first part of the crisis. It aggressively cut interest rates from 5.25 percent in September 2007 to 2 percent in April 2008. And it midwifed a deal for Bear Stearns—taking on $30 billion of its crappiest assets—to prevent an all-out panic. By April, Bernanke was justified in saying that “we ought to at least modestly congratulate ourselves.” The TED spread had come down from end-of-the-world-terrible to merely terrible levels. And though unemployment had risen to 5.4 percent, that wasn’t too bad when you considered that housing had already fallen 20 percent from its 2006 peak.
It looked like we might muddle through with something like the 1990 recession: a shallow, but long, slump, with a weak financial system, but no panic. This is the three-chapter story of why that didn’t happen, the story of the three Fed meetings that took place during the summer of 2008, whose much-anticipated transcripts were finally released last week.