Judith Stein: Where Recessions Don't Matter -- At the Fed

Judith Stein is a professor of history at the City University of New York's City College and Graduate Center and the author of "Pivotal Decade: How the United States Traded Factories for Finance in the 1970s."

The recent release of the 2006 minutes of the Federal Reserve Board - after the standard five-year lag - led many to wonder how the nation's chief financial stewards could have missed signs of the coming Great Recession. An examination of minutes over the last 30 years reveals that they failed to anticipate other downturns as well.

Ever since the appointment of Paul Volcker as chairman in 1979, the Fed has judged inflation to be the major economic threat facing the nation, downplaying the dangers of unemployment and recession. Late that year, the Fed raised interest rates to tackle inflation caused largely by high energy prices and mortgage interest rates. In April 1980, Volcker worried about a possible recession (which soon came), but he was afraid to change course and address it because "it would be interpreted by the financial community as a sign that the Fed was 'quitting premature.' "

The 1980 recession was brief, but so was the recovery. The Fed not only failed to anticipate the 1981-82 recession, the era's largest until the most recent one; it also delayed action once it began. In August 1981, with inflation high, the Fed feared "a great boom" - not the recession that had actually already begun. By March 1982, some of the governors blamed themselves. "I think the state of the economy is ... principally our responsibility, not that of anybody else," said one of them, Lyle Gramley....