As the subprime mortgage crisis began heating up in 2007 and 2008, nobody really knew to what extent it would bludgeon the rest of the economy.
Now that Federal Reserve has published the transcripts from its 2008 Federal Open Market Committee meetings, we know that monetary policymakers were also “puzzled” by the linkages between the subprime market, the stock market, and the economy at large.
Here’s then-Chairman Ben Bernanke speaking at the March 2008 FOMC meeting:
I had been puzzled about the quantitative relationship between the subprime problems and the stock market. I think that the actual money at risk is on the order of $US50 billion from defaults on subprimes, which is very small compared with the capitalisation of the stock market. It looks as though a lot of the problem is coming from bad underwriting as opposed to some fundamentals in the economy. So I guess I’m a bit puzzled about whether it’s a signal about fundamentals or how it’s linked to the stock market.
Well, now we know.