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The Federal Open Market Committee (FOMC) is the main policy-making body of the Federal Reserve. It has 7 members, as well as 12 presidents from regional Fed banks. From 2004 to 2006, FOMC transcripts show that Fed officials rarely discussed subprime mortgages or complex derivatives. Both were significant factors in the 2008 financial crisis. For example, discussions about housing during 2005 and early 2006 were moderately sanguine; by late 2006 concerns rose somewhat but then chairman Ben Bernanke stressed that housing represented only 15% of the economy. Regulators paid relatively little attention to leverage risks despite having had to deal with them during 1998’s Long-Term Capital Management hedge fund collapse

Several theories have tried to explain why the Fed didn’t do more in advance of the 2008 crash. Some people think it was a result of regulatory capture, but that’s not true. The top Fed officials were actually pretty good at their jobs and they weren’t slaves to any one school of thought. They also didn’t rely exclusively on models that ignored the real economy or focus too much on inflation when dealing with systemic risks.

It’s not that the Fed didn’t know about the housing bubble. It knew and it let it grow bigger because of its belief in post hoc interventionism. This is where you try to fix things after they happen instead of preventing them from happening at all. In addition, organizational structure also played a role in letting this happen by making sure there was no give-and-take between people during meetings, as well as focusing on consensus rather than exploring alternatives. The fact that some sources were favored over others and the lack of input from their bank supervisory team diverted them away from seeing what was really happening with the financial system before it was too late.