Why the Federal Reserve Failed to See the Financial Crisis of 2008: The Role of "Macroeconomics" as Sense-Making and Cultural Frame

One of the puzzles about the financial crisis of 2008 is why the regulators were so slow to recognize the impending collapse of the financial system. In his talk, Neil Fligstein proposes a novel account of what happened. On the basis of an analysis of the meeting transcripts of the Federal Reserve’s main decision-making body, the Federal Open Market Committee (FOMC), he shows that there has been surprisingly little recognition that a serious economic meltdown was underway even after the collapse of Lehman Brothers. This lack of awareness was a function of the inability of the FOMC to connect the unfolding events into a narrative reflecting the links between the housing market, the sub-prime mortgage market, and the financial instruments being used to package the mortgages into securities. The Federal Reserve’s main analytic framework for making sense of the economy, macroeconomic theory, made it difficult for them to connect the disparate events that comprised the financial crisis into a coherent whole. The talk concludes with implications for future crises and for thinking about sense-making and the role of economics in policy making more generally. Neil Fligstein is Professor in the Department of Sociology at the University of California, Berkeley, and the director of the Center for Culture, Organizations, and Politics at the Institute for Research on Labor and Employment. He is currently working on aspects of the current financial crisis