The Federal Reserve's latest release of transcripts of its policy-making committee meetings after five years has provided plenty of fodder for the Fed's critics.
Here we were in 2007, at the start of a stomach-churning financial crisis, and hardly a hint in hundreds of pages that anyone in the room saw it coming. They had reams of detailed data on trees and somehow never saw a forest.
Some of that criticism is justified, as forecasts proved so wrong as to be almost absurd. But the record also shows that these Fed officials understood plenty as it was happening. The actions they did take in response set the Fed's course for the kind of stunning intervention that played a key role in later providing stability to an economy then in free fall.
Fed transcripts may sound like grist for monetary policy wonks and academics, but they are a great window into an important role at one of this country's most powerful institutions.
An institution, by the way, not exactly set up for efficiency. The main monetary policy group is called a committee and acts like one. It's made up of seven members of the Federal Reserve Board, the president of the Federal Reserve Bank of New York and four of the remaining 11 bank presidents, although the rest of the bank presidents sit at the table and jump into discussions.
And the critics of the Fed have a point in that meetings in 2007, a dramatic year, seem, well, sleepy. They make announcements about lunch. They settle friendly bets made on the outcome of the NBA finals. They joke about how certain they are to be criticized, no matter what they do.
As a group, they were pretty sunny at the start of the year, more worried about inflation than anything else, as the economy was humming.
The conversations Fed presidents reported to the group from sources in their home districts grew darker as the year progressed. Fed officials openly discussed mortgage default rates, declining credit performance of pools of home mortgages and the near disappearance of any sub-prime mortgage lending.
By the time of a regularly scheduled meeting on Aug. 7, some of the sub-prime mortgage lenders had already dried up and blown away. American Home Mortgage, once the 10th-largest mortgage originator in the country, had declared bankruptcy the day before.
A number of people at that meeting talked about the faltering sub-prime mortgage securities market and losses of more than $100 billion. A Fed staffer briefed the group on evidence of spreading contagion, and then-San Francisco Fed President Janet Yellen later that morning remarked that the financial fallout spreading into other sectors "is a source of appreciable angst."
What may seem odd is that the Fed didn't move to cut interest rates or otherwise change policy at this meeting, and the best explanation is that this group appropriately understood its mission first is to be cautious.
Then-Fed governor Kevin Warsh told his colleagues that the diagnosis "was the easy part," that what's difficult is figuring out consequences "and perhaps most difficult is to determine whether any treatment is needed or whether, as the Hippocratic oath suggests, the patient will recover on its own."
The committee was also very sensitive to the signals it sends the markets for bonds and loans and other financial instruments. And these were people who believed in a market economy.
Having once-burned investors go back to buying bonds they actually understood was a good thing. Having an overleveraged and ineptly managed lender close up shop is a good thing, another form of the market cleaning up after itself.
They fretted about the problem of moral hazard, the idea that a monetary easing policy can't pump in money to bail out investors. To do so only encourages even more bad behavior.
It was not their job to worry about investors that owned worthless subprime mortgage securities. It was to promote stability.
So the policy was wait and see. It lasted three days. After more choppy trading in global securities markets and signs that credit was freezing up, the Fed concluded stability was at risk.
During a short conference call, the committee was briefed on the Fed's intervention that morning to inject money into the system. Chairman Ben Bernanke was moving on from discussions about moral hazard, saying "it's a question of market functioning, not a question of bailing anybody out. That's really where we are right now."
By the end of the year, of course, the word recession was cropping up repeatedly in committee conversations. Bernanke closed the December policy discussion by saying "it is very important that both in our statement and in our inter-meeting communications that we signal our flexibility, our nimbleness."
The 2008 transcripts released next year will be of discussions during that dramatic year, when major investment banking firms collapsed, credit markets totally seized up and even sensible people were trying to decide whether a coffee can was the best place to put cash.
In 2008 the Fed acted over and over. By the end of the year the loans made under the Fed's emergency programs had topped more than $1 trillion.
It's aggravating to consider who got those loan. But those 2008 Fed transcripts will likely show, as the 2007 batch does, that the Fed's monetary policy arm is an imperfect system run by imperfect people that seems to work pretty well.