Why the Federal Reserve Failed to See the 2008 Financial Crisis: The Role of “Macroeconomics” as a Sensemaking and Cultural Frame

In this very interesting and enlightening paper by Neil Fligstein, Jonah Stuart Brundage & Michael Schultz (University of California, Berkeley), they tackle one of the puzzles about the crisis of 2008: why the regulators were so slow to recognize the impending collapse of the financial system.
Analyzing the meeting transcripts of the Federal Reserve’s main decision-making body, the Federal Open Market Committee (FOMC), the paper shows that regulators had surprisingly little recognition that there was a serious financial crisis brewing as late as December 2007. 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 subprime mortgage market, and the financial instruments being used to package the mortgages into securities.
The researchers use the idea of sensemaking to explain how this happened. The Fed’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. Using topic modeling to analyze transcripts of FOMC meetings held between 2000 and 2007, they demonstrate that the framework provided by macroeconomics dominated FOMC conversations throughout this period. The topic models also show that each of the issues involved in the crisis remained a separate discussion and were never connected together.
Economists in particular and professions in general use their frames to engage in sensemaking activities all of the time. But such activities rely on the control of important organizations and government institutions. The Federal Reserve is an organization that exerts great control over the financial system and the real economy, and it is controlled by macroeconomists. The power of professions hinges upon limiting who gets to speak and what terms they can use when they speak in those organizations. Economic sociology has recently become very interested in the ways that economists’ models make markets. This article suggests that their influence over discussions in regulation and policymaking depend as much on their control of those organizations as the substance of their models.
(To the paper- open access)

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