I wish there was a cogent way to explain this point of view -- a point of view that is distressingly common among market commentators and politicians -- that didn't resolve back to the title of this article.  But.... there isn't.

As of 2007, the Fed was unprepared for what was to come, though not mainly for the reason most commentators are highlighting. The initial reporting on the transcripts has focused on whether or not the Fed saw the financial crisis coming, and most find that the Fed did not. But the Fed also missed something much more important.

For all the attention the financial crisis gets in the story of the latest recession, it isn’t that important to understanding our current weak economy. The reason that more than 12 million people are unemployed, that workers no longer quit their jobs or get raises, and that economic prospects are dim for the foreseeable future, has to do with the financial health of consumers, not the health of Wall Street.

The article goes on to conclude...

Reading the transcripts from 2007 makes it clear that, even though it didn’t understand the extent of the problems, the Fed was looking at the financial system as the main source of concern. Households, suffering from the housing-bubble collapse, were a secondary priority. An economic elite more in tune with broader prosperity could have caught the severity of the recession earlier, and made a case for the demand-stimulating monetary policy needed to recover from it.

Nonsense.

This is in fact pining for that which never was.

The simple fact of the matter is that since 2000, and to some extent even before then, the economy was floating on a false premise.

Look at the below chart:

From the late 1990s through 2007 there was anywhere from 2-6 times as much debt taken on in a given quarter as there was expansion in the economy.

There was no actual economic "growth" created through productive output -- it was all financed through promises to pay tomorrow for hamburgers today.

In fact this pattern began in earnest in the early 1990s.

This is the "big scam" among writers and pundits when it comes to "doing more" and "stimulating the economy"; they all proceed from a false premise, that the problem is a transient lack of demand and if we simply add more stimulus economic response will come in the form of greater output and ability to pay.

The facts say that this is not what happens -- and it is particularly not what happens when you lower interest rates and make borrowing cheaper.  Instead, what expands is systemic leverage, or promising to pay tomorrow for hamburgers eaten today.

This was lampooned so many years ago, of course, by the cartoon character Wimpy who first appeared in the 1930s!  It seems that in 1931 cartoonists were very much willing to lampoon the idiocy of the 1920s in terms of debt expansion, but we seem to have forgotten that lesson.

To make matters worse the government has dramatically raised the costs of hiring people.  Obamacare, for example, has turned the employment world on its ear, especially when it comes to the lower end of the scale.  How many 27-year-olds are about to get a nasty surprise when they are expelled from their parents' health insurance and find that (1) their own policy costs $5,000 a year, (2) their boss has cut them to 28 hours a week (from 40) because at 30 they must provide that insurance, a gross pay reduction of 30%, (3) at $15/hour (a pretty good starting wage) they're now grossing $21,000 a year and (4) they don't qualify for any sort of "assistance" as they make too much money, but roughly 1/4 of their gross, before taxes, must either be paid for that "insurance" or they get fined for not having it!

Markets always force resolution of distortions that are foisted upon it.  It may take time before it happens, as the madness of crowds is not to be underestimated. 

But it always happens.

The problem we have in the economy today is that the so-called "demand" in the economy since the early 1990s was not real.  It never existed in terms of organic output and thus trying to revert to what was is impossible, as what "was" didn't really exist.  That ever-increasing alleged demand was predicated upon an exponential series that ran to exhaustion in 2007 and collapsed.

It is the previous level of organic demand that is being returned to, which is much less than what which was allegedly "experienced" in the 1990s and 2000s -- not the "previous" figures that were driven by debt leverage expansion. 

The entire point of the policies of the Federal Government and Federal Reserve have been aimed toward refusing to recognize this mathematical reality and the economic outcome that must come from this adjustment.

The sooner we face reality the better the outcome will be.

But this is, and will remain, a relative term, for in comparison to the fraud-laced "prosperity" that was claimed for the 1990s and 2000s the factual economic output that is sustainable in real terms, less that fraud, is considerably lower than that which we previously "enjoyed" -- just as Wimpy could not have possibly maintained his corpulent status but for his scamming hamburgers via bogus promises to pay for them next Tuesday.