Into oblivion with an oblivious Fed by Steve Keen Published 8:18 AM, 28 Jan 2013

One of the beauties of the modern age is that documents that once would have been either inaccessible, or taken years of sleuthing to locate, are now readily downloadable from the Web. One such set of documents is the transcripts of the meetings of the US Federal Reserve's Federal Open Market Committee in 2007, all of which have now been released.

Everyone who wants to understand why we’re now mired in a permanent economic slump should read these documents – not because it will explain the slump itself, but because it confirms that those who were supposed to ensure that such calamities didn’t occur were clueless about the approaching crisis. Jim Cramer famously ranted precisely the same message at the time, and copped a lot of flak about it, but he was dead right – and the transcripts prove it.

The best instance of this is the report of the August 7 meeting of the committee, which predated the now-acknowledged start of the crisis by a mere two days. There was of course discussion of the turmoil in financial markets and firms – there could hardly not have been – but that wasn’t the main danger that the FOMC foresaw at this time. Nope, according to most of them, the greatest medium term threat to the economy was … rising inflation!

That was garbage of course, and I’m not merely relying upon hindsight in saying that. As many ordinary citizens could feel, and as a few analysts including me were saying vocally at the time, the real crisis facing the US economy at the time was the bursting of a private debt bubble. But there was literally no discussion of that – not even any awareness of that – at the FOMC.

There was indeed a short-term uptick to inflation, but it was followed by a plunge into deflation as the monthly rate fell from 1 per cent per month in mid-2008 to minus 2 per cent per month in late 2008. The Fed’s and the Treasury’s massive interventions since then certainly played a role in reversing the initial deflation, but as the trend plot shows, that is still the direction in which the US economy is headed.