Conclusion

Framing suggests that groups will have a language to carry on their discussions but will tend to miss things outside of their primary frames. The existence of a frame coupled with a tendency toward positive asymmetry implies that groups often obscure or normalize discordant facts.

Their focus on the fundamentals of the housing market using conventional economic theory made them doubt that there was a house price bubble in the first place. Their use of macroeconomic models to estimate the effects of a 20 percent house price reduction on the economy reassured them that if there was a problem, it was manageable. They did not see such a decline as having any impact on the large economy except through reductions in construction, some durable goods for housing, and the ability of households to consume as their net wealth declined. While they saw such effects as significant, they did not see them as creating systemic problems.

As foreclosures heated up in 2007, the FOMC did not see the link between this downturn and possible problems for the banks. Indeed, the house price decline and uptick in foreclosures was taken as a sign that the economy was rebalancing itself. From the perspective of the members of the FOMC, investment was going to move out of the overheated housing market and toward the economy.

It was not until the fall of 2007 and the winter of 2008, when the financial markets were in turmoil, that the connection between MBSs / CDOs and the foreclosures was finally a topic of conversation. The sense of crisis was height­ened by the spring of 2008 when Bear Stearns collapsed in a matter of days. But the main worry at that time was the possible spillover effects of Bear Stearns's problems to other banks, not to the larger economy. These effects were framed as a concern with the liquidity problems of other banks. The actions the FOMC undertook were aimed at providing liquidity to banks by opening up the credit window, buying agency-backed MBSs, and lowering the federal funds rate sub­stantially. The goal was to keep the supply of credit high and signal to the mar­kets that the Federal Reserve was prepared act quickly to prevent more banks from becoming insolvent.

But as the Bear Stearns crisis abated, the FOMC became obsessed with a new set of events. There were price spikes in food and oil, and by the summer of 2008, the macroeconomic focus of the FOMC led more than half of its members to shift their focus from the financial crisis to a concern about inflation. This made many members of the FOMC interested in raising, not lowering, interest rates. Their argument was that the crisis playing out on Wall Street was going to be contained within the financial sector with little lasting spillover to the rest of the economy. The travails of that sector were not viewed as disruptive to the overall real economy. But a concern over potential runaway inflation meant that the overall economy was going to be worse off.

This conflict played out through the demise of Lehman Brothers on Septem­ber 15, 2008, when members of the FOMC who thought inflation was still the big issue facing the economy going forward held their ground. But within two weeks, to their credit, the members of the FOMC shifted their focus to support Chair Bernanke's efforts to prevent an entire meltdown of not just the financial sector but the whole economy and with it the world economy (Abolafia, 2020). The FOMC under the leadership of Chairman Ben Bernanke aggressively pur­sued every effort to shore up the banks and the financial sector and prevent a meltdown reminiscent of the Great Depression. While they could not forestall a Great Recession, they were able to prevent an entire collapse of the banks and a rerun of the Depression of the 1930s.