Why the Federal Reserve Missed the Financial Crisis: The Role of Sensemaking and Cultural Frames

• In Event: 265 - Regular Session. Economic Sociology: Regulatory and Local Responses to Financial Crisis: Discursive, Cultural and Social Structural Foundations

Abstract

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 this, paper, we propose a novel account of what happened. We analyze the transcripts of the Federal Reserve’s main decision making body, the Federal Open Market Committee (FOMC), and show that they 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 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. We use the idea of sense making to understand how this happened. The main analytic framework to analyze the economy, macroeconomic theory, made it difficult to connect the disparate events that made up the financial crisis into a coherent whole. We use topic analysis to demonstrate that the framework provided by macroeconomics dominated their conversations. The topic analysis also shows each of the issues involved in the crisis remained a separate discussion and were never viewed as connected. An analysis of the texts supports this argument. We conclude by suggesting what this means about future such crises and more generally about culture and sense making.
 

Authors

• Neil Fligstein, University of California-Berkeley

• Jonah Stuart Brundage, University of California-Berkeley

• Michael Schultz, University of California-Berkeley