Transcripts show Fed grappling with 2008 crisis
Bernanke, officials agonized over use of untried measures
WASHINGTON—The Federal Reserve agonized throughout 2008 over how far to go to stop a financial catastrophe that threatened to pull the US economy into a deep recession, transcripts of its policy meetings that year show.
“We’re crossing certain lines. We’re doing things we haven’t done before,” Chair Ben Bernanke said as Fed officials met in an emergency session March 10 and OK’d never-beforetaken steps to lend to teetering Wall Street firms, one of a series of unprecedented moves to calm financial markets and aid the economy. “On the other hand, this financial crisis is now in its eighth month, and the economic outlook has worsened quite significantly.”
The crisis had been building for months. In an emergency conference call Jan. 21, Bernanke had rallied support for a deep cut in interest rates. He warned that market turmoil illustrated investors’ concerns that “the United States is in for a deep and protracted recession.”
Bernanke apologized to his colleagues for convening the call on the Martin Luther King holiday. But he felt the urgency of the crisis required the Fed to act before its regularly scheduled meeting the next week. The Fed approved a cut of three-fourths of a percentage point in its benchmark for short-term rates.
On Friday, the Fed released hundreds of pages of transcripts covering its 14 meetings during 2008—eight regularly scheduled meetings and six emergency sessions. The Fed releases full transcripts of each year’s policymeetings after a five-year lag.
The 2008 transcripts cover the most tumultuous period of the crisis, including the collapse and rescue of investment bank Bear Stearns, the government takeover of mortgage giants Fannie Mae and Freddie Mac, the fateful decision to let investment bank Lehman Brothers collapse in the largest bankruptcy in US history and the bailout of insurer American International Group.
For all its aggressive actions in 2008, the transcripts show the Fed struggling at times to grasp the speed and magnitude of the crisis. Bernanke and his top lieutenants often expressed surprise that they weren’t succeeding in calming panicky investors.
As late as Sept. 16, a day after Lehman Brothers filed for bankruptcy, Bernanke declared, “I think that our policy is looking actually pretty good.”
The Fed declined at that meeting to cut the benchmark shortterm rate it controls. Just three weeks later, after the Fed had rescued AIG, Bernanke convened an emergency conference call. In it, he won approval for a half-point rate cut.
The tone of the meetings shifted during the year as the crisis worsened. In January, Frederic Mishkin, a Fed governor, missed an emergency conference call because he was “on the slopes.”
“I think in Idaho somewhere,” Bernanke said.,
The transcripts reveal the arguments Bernanke deployed to marshal support for the unorthodox policy actions—including support from Janet Yellen, who succeeded Bernanke this month as Fed chair. At the time, Yellen was head of the Fed’s San Francisco regional bank.
At an Oct. 28-29 Fed meeting, Yellen noted the dire events that had occurred that fall. With a nod to Halloween, she said the Fed had received “witch’s brew of news.”