The Great Recession! It's right behind you!

By R.A. | LONDON

THERE is a delicious moment in the popcorn thriller Air Force One, a summer blockbuster in which terrorists hijack the titular plane and the president of the United States, played by a steel-gazed Harrison Ford, works to foil their plot, recapture the plane, and avert an international crisis, all more-or-less single-handedly. In the aftermath of a moment of heroism the president is face-to-face with one of his secret service agents—who (we know but the president does not) helped the terrorists get on board the plane. Mr Ford's character trustingly enlists the agent's help and hands him a weapon, provoking a wonderful, audible groan across the threatrical audience.

It is the rare Hollywood script imbued with as much dramatic irony as the most recent batch of Federal Reserve transcripts, covering the 2008 meetings of the Federal Open Market Committee. That, you may recall, was an eventful year, and Fed watchers have been anxiously awaiting this set of transcripts (they are typically published on a five-year lag). Upon their release on Friday, the wonkosphere (including your correspondent) quickly poured over the documents, took to Twitter to post the most groan-inducing statements, then sat back to savour the groans.

What did the transcripts show? As it turns out, the FOMC was late to recognise the severity of the financial crisis and slow to head off the economic damage. But that's no surprise; it is, after all, why we had a severe financial crisis and recession. Somewhat more interestingly, we learn how they got it wrong: in general by being too conservative and specifically by worrying too much about inflation. The most painful remarks are those made in the September meeting, which fell right on the heels of the Lehman bankruptcy, to the effect that the Fed must remain vigilant about price pressures—upward ones. (Super-scientific analysis: in the September meeting the word crisis was uttered 13 times while inflation was mentioned 129.) But we also knew that—knew it as soon as the statement was released, really.

We learn who the heroes and villains are and just how they structured their arguments. We can read the impassioned argument made by Eric Rosengren, of the Boston Fed, who urged his colleagues to cut rates in September of 2008—in proper dramatic fashion, for the only thing more beautifully tragic than their ignorance of what lies ahead is a monologue describing the future, which they disregard. A detailed study of (the hundreds and hundreds of pages of) the transcripts could help reveal how views within the FOMC evolve, potentially teaching us something about decision-making under pressure.

At the same time, it's all too easy to mistake basic human fallibility for villainy. Brad DeLong catches Tim Geithner in January of 2008, when he was vice-chair, waxing (relatively) optimistic about the state of the economy. Mr DeLong writes;

So, yes, Geithner started out January 2008 well behind the curve, and far, far to the right of the expectations of the Yellen Tendency and others with beliefs marked-to-market.

And–whether it was the vulnerability of the “too big to fail” money-center banks, the state of financial system, the state of aggregate demand, the state of the labor market, or the dysfunction of the Republican Party–I do not think that he ever managed to catch up to the curve.

But if we look back just one month, to December of 2007, we find Mr Geithner among the more alarmist members of the FOMC:

I don’t think the past four to six months have been kind to those who have argued that this was just a mild and transitory bump. As in August, I think we have to be willing to treat both the fever and the infection and, if you step back a second, the appropriate policy response to this set of challenges will entail a mix of measures. Monetary policy will probably have to be eased further to contain the risk of a more substantial and prolonged contraction in demand growth. I think we will probably need to continue to adjust our various liquidity instruments. We may need to encourage some institutions to raise more equity sooner than they otherwise might choose to do. We need to be very careful to avoid making both types of the classic errors in supervision in financial crises...We also need to be careful to keep thinking through more adverse scenarios for the economy and the financial system and the policy responses that may be appropriate if they materialize.

The United States is, I think, a remarkably resilient economy still...But we need to be cognizant that the market is torn between two quite plausible scenarios. In one, we just grow below potential for a given period of time as credit conditions adjust to this new equilibrium; in the other, we have a deep and protracted recession driven as much by financial headwinds as by other fundamentals. There are good arguments for the former, the more benign scenario, but we need to set policy in a way that reduces the probability of the latter, the more adverse scenario.

In January he may have entertained broader thoughts about the resiliency of the American economy. But by March Mr Geithner was incisive about the nature of the trouble facing the economy:

I understand that there is a huge amount of uncertainty about estimates of equilibrium, but we can’t be facing both the most serious risk of a financial crisis and of a deep, prolonged recession in 50, 30, or 20 years and at the same time the risk of having a very substantial rise in underlying inflation over the medium term. It seems to me that we are going to have one or the other. The choice we face, of course, is which risk we are prepared to take. Which mistake is the easier to correct for? It is a very hard judgment to make.

But I think we have to be confident that, if we end up being successful in averting the risk of a very, very dangerous, damaging spiral in the financial markets with the consequences of a very deep recession or a deeper recession than in the early 1990s, then we will be able to deal with the likely consequences that we will have more inflation and less moderation than we now anticipate. I guess I don’t understand why we would not be confident in that. So let me just say that I don’t think this is easy. Like many of you, I think that it would be great if we got away with [a cut in the federal funds rate of only 50 basis points], but I think that is not tenable—not even close in this context.

Even though it would be nice if we had a consensus in the United States about a set of fiscal measures that we think would be good on the merits, we can’t make monetary policy in a framework where we condition our actions on actions by the Congress. In an environment like this, it is not possible. If we do the right thing, does that mean it takes the pressure off them? Maybe, but probably not so much. But it can’t constrain us from doing what is appropriate now.

Mr Geithner came out strongly in favour of a 75-basis-point cut, which was in fact the decision the FOMC took. So was he a villain or a hero? More the latter if you ask me. But above all he was a human—experienced in global finance, yes, but even so—trying to assess the plausibility of the occurence of an event well outside the lived experience of everyone in that room, and faring reasonably well all things considered.

No one expects the Great Depression. Those few individuals who correctly reasoned their way to concern that something qualitatively similar might be a possibility deserve kudos. The overwhelming majority of people on this planet did not, nor should we be particularly surprised or even disappointed that they failed to. Should the Fed have cut rates in September? Yes, of course it should have. But we shouldn't pretend that these were uniquely foolish men and women, that they failed to make the obviously correct decision.

The essence of the tragedy is its inevitability. Choices that were made over long years set the economy on its course toward a ruin that we could not see or adequately anticipate. We need to be careful not to be overly harsh in our judgment of people whose main shortcoming was their ignorance of the future: a future they could have prevented, yes, but only if they could have known, with great confidence, that the danger was real. It was! But only because they couldn't anticipate it. Central banking makes for superb tragedy.

Of course, once the map has been illuminated and the nature of the ruin is clear to all, then everything changes. I think we all imagined that the transcripts of 2008 would be the most damning, but they won't. It will be in the transcripts from 2009 and later that we learn who saw the ruin around them and turned a blind eye or refused to update their thinking: when the real villainy will be exposed.

But then I suppose we already know about that too; it is, after all, why there are still more than 10m people out of work in America. What we really want from the transcripts is a satisfying answer for why the FOMC has been so stubbornly reticent to do more about the labour-market disaster that has played out since 2008. But they won't be able to give us that, unfortunately. Because there isn't one.