Some of the Fed’s staff earlier had talked about the potential risks, but in that meeting and in subsequent ones that year , there was a glaring absence of alarm about the dangers of the housing bubble and what might lie ahead for the broader economy.
The Fed didn’t just fail to predict and prevent the downturn. The Fed caused the bubble whose bursting caused the downturn.
Austrian economics as I understand it predicts that interest rates kept artificially low over time will lead to malinvestment.
When people borrow without government intervention it’s from their and others’ savings — which are dollars put aside for future use. People borrow when interest rates are low. When interest rates are low, people are cool with spending money because they’re not earning much by saving it.
Borrowers use the borrowed money to create things other people will want to buy, and people buy them with the money they’re no longer saving. Eventually enough people are borrowing and so few people are saving that money to borrow becomes scarce relative to demand and interest rates go up again. People cool their buying jets and start saving again.
The proportion of people who want to borrow, spend and save at any one time determines interest rates, which signal to people what they should be doing with their money. It’s a beautiful, self-regulating process.
Problems occur when interest rates are kept low without the actual savings, that is, when money seems plentiful but actually isn’t. Then people borrow to make shit that it turns out no one actually has any money to buy. There are no savings for people to dip into to buy the shit borrowers are making. Then you’ve got money tied up in investments that will never pay off, like McMansions. Lameage.
My point is this. The geniuses at the Federal Reserve obviously can’t predict or prevent economic downturns. They can only create them, by fucking with interest rates. So, you know, end the Fed.