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Friday, February 21, 2014

Weekend Reading: 2008 FOMC Transcripts

by Calculated Risk on 2/21/2014 08:43:00 PM

From some weekend reading, here are the 2008 FOMC transcripts.

Here is a gem from August 2008 from St Louis Fed President James Bullard:

My sense is that the level of systemic risk associated with financial turmoil has fallen dramatically. For this reason, I think the FOMC should begin to de-emphasize systemic risk worries. My reasoning is as follows. Systemic risk means that the sudden failure of a particular financial firm would so shock other ostensibly healthy firms in the industry that it would put them out of business at the same time. The simultaneous departure of many firms would badly damage the financial services industry, causing a substantial decline in economic activity for the entire economy. This story depends critically on the idea that the initial failure is sudden and unexpected by the healthy firms in the industry. But why should this be, once the crisis has been ongoing for some time? Are the firms asleep? Did they not realize that they may be doing business with a firm that may be about to default on its obligations? Are they not demanding risk premiums to compensate them for exactly this possibility? My sense is that, because the turmoil has been ongoing for some time, all of the major players have made adjustments as best they can to contain the fallout from the failure of another firm in the industry. They have done this not out of benevolence but out of their own instincts for self-preservation. As one of my contacts at a large bank described it, the discovery process is clearly over. I say that the level of systemic risk has dropped dramatically and possibly to zero.
emphasis added
And then the economy collapsed. I guess the "discovery process" wasn't over!

From Annie Lowrey at the NY Times Economix: How the Fed Saw a Recession, Then Didn’t, Then Did. From January 2008:
JANET L. YELLEN: The severe and prolonged housing downturn and financial shock have put the economy at, if not beyond, the brink of recession.

RICHARD FISHER: While there are tales of woe, none of the 30 C.E.O.’s to whom I talked, outside of housing, see the economy trending into negative territory. They see slower growth. Some of them see much slower growth. None of them at this juncture – the cover of Newsweek notwithstanding, a great contra-indicator, which by the way shows “the road to recession” on the issue that is about to come out – see us going into recession.

CHARLES EVANS: Our cumulative actions following this meeting should provide noticeable stimulus to the economy by midyear.… In the absence of further negative developments, growth should improve in the second half of this year.

ERIC ROSENGREN: We could soon be or may already be in a recession.
As I've noted over the years, Dr. Yellen is usually correct and Mr. Fisher is frequently funny - and usually wrong. 

From Cardiff Garcia at the FT Alphaville: FOMC transcripts: Bernanke on Japanese vs American monetary policy (or QE vs credit easing)

More excerpts from the NY Times: Inside the Fed’s 2008 Proceedings

And more from Annie Lowrey at the NY Times Economix: In a Dark Year, a Lighter Side at the Fed
MR. MISHKIN: I am very skeptical of [household surveys] because they tend to react very much to current conditions. Also, if you ask people what TV shows they are watching, they will tell you that they are watching PBS and something classy, but you know they are watching “Desperate Housewives.”

MR. BERNANKE. What is wrong with “Desperate Housewives”?