There were eventually enormous information problems in assessing the risks of extremely complex asset-backed securities, and there was a huge underestimation of the potential for correlated systemic risks. None of these causes had anything to do with monetary policy, except that monetary policy may have contributed to the Great Moderation. Regarding the role of Federal Reserve monetary policy in the crisis, there are two relevant questions. First, was the low interest rate reasonable given the information available at the time? Second, could a different monetary policy with higher interest rates have prevented the crisis? The first question, whether the low interest rate was reasonable given the available information, is the relevant one when evaluating monetary policy. It is more relevant to evaluate policy taking into account the information available ex ante to the policymaker rather than information ex post that was unknown to the policymaker at the time (see Svensson, 2009a, on evaluating monetary policy ex ante and ex post). 7 During the period in question, given the information available, there was a genuine and well-motivated fear of the U.S. falling into a Japanese-style deflationary liquidity trap, and the optimal policy in such a situation is a very expansionary monetary policy. 8 It may be that, in retrospect, the risk of deflation was exaggerated, but there was no way to know this ex ante. Hence, I consider the expansionary policy very appropriate. Adding some ex post evaluation, one can note that it did not lead ex post to very high inflation or an overheated economy.
The Federal Reserve has made substantial investments in data and analytical staff for financial market monitoring. Each day, the Trading Desk at the Federal Reserve Bank of New York analyzes and internally distributes reports on market developments, focusing on those markets where prices and volumes are changing rapidly, where news or policy is having a major effect, or where there are special policy concerns. Those analyses begin with quantitative data, supplemented with information obtained through conversations with market participants and reviews of other analyses available in the market. Over the past few years, the Desk has worked closely with our research staff in developing new quantitative tools and new data sources. BIS Review 16/2010  13  This ongoing monitoring requires continual evaluation of new data sources and analytical tools to develop new data as new markets and practices develop. For example, information on market volumes and prices can be collected from new trading platforms and brokers, data on instruments such as credit default swaps, or CDS, are provided by vendors or market participants, and fresh insights are gained from new methods of extracting information from options data. In some cases, publication of data by the private sector may be mandated by legislation (such as, potentially, trade data from over-the-counter derivatives trade repositories); in other cases, the Federal Reserve or other government agencies or regulators require or encourage the gathering and publication of data.