The Federal Reserve on Friday released transcripts from its 2008 meetings as the financial crisis consumed the global economy, a tumultuous period during which the U.S. central bank forged into uncharted waters, initiating a host of unprecedented measures in an effort to stave off another Great Depression.
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The transcripts show a transition from an entity at first determined to maintain its traditional role of simply maintaining stability into one willing to try just about anything to avert a worse disaster than the one unfolding in front of them.
The hundreds of pages of documents shed light on the decision-making process – the agreements as well as the quarrels -- that led to unprecedented interventions such as the massive bailout of banks deemed “too big to fail,” a series of emergency lending measures, the lowering of the key fed funds interest rates to near zero and the long-running bond purchase program known as quantitative easing.
The writing was on the wall early in the year, as Fed Chairman Ben Bernanke, spooked by a rocky U.S. housing market and falling stock prices, convened an emergency conference call in mid-January to convince his colleagues to lower interest rates by 0.75 percentage points, the most in two decades.
Things didn’t improve.
Transcripts from a conference call on March 10, 2008 reveal that Fed policy makers were growing increasingly alarmed at the rapid deterioration of global markets. At the time the call was made investment bank Bear Stearns was on the brink of collapse, hemorrhaging money as the U.S. housing market spiraled downward.
Bernanke apologized for the short-notice, emergency conference call (one of many in 2008), then said, “We live in a very special time. We have seen, as you know, significant deterioration in term funding markets and more broadly in the financial markets in the last few days.”
The Fed chair then noted the problems that seemed to be spreading, citing “credit deterioration,” and “increased expectations of recession,” as well as “some self-feeding liquidity dynamics at work.”
Bernanke proposed two options: an emergency term securities lending facility and to expand and extend the currency swap lines with struggling European banks.
The transcripts, which run into the hundreds of pages, reveal that this was the beginning of a series of measures – many of them unprecedented -- taken by the Fed in an effort to stave off another Depression. At first the Fed attempted to stick to tried-and-true policies – just enhanced versions of them. But it soon became clear that those measures weren’t working – the Fed would have to be innovative.
As late as September of that year – even after the collapse of the investment bank Lehman Brothers – Fed officials weren’t convinced the troubles in credit and housing markets threatened the global economy. But that mood would change quickly and dramatically, in particular with the news that insurance giant American International Group (NYSE: AGI) was also on the brink of collapse.
Also emerging on the horizon was the threat of a run on usually-stable money market funds.
“I would emphasize that a real concern is that there will be a run this week on money market funds because they may have to freeze the funds. It is possible that they will break the buck, and this will be at organizations that don’t have sufficient capital to make people whole. So I think that is a real concern,” said Boston Fed President Eric Rosengren at the Fed’s Sept. 16 meeting.
The problems were quickly snowballing.
By late October, after the Lehman collapse and the fire sales of several other large banks on the brink of collapse, the Fed had dropped interest rates to about 1% and introduced a host of other emergency measures. Negotiations were underway for a massive bailout of Wall Street.
And Fed policy members were apparently quarreling over whether those measures were working and if how they were communicated to the public was helping or harming confidence.
At the Fed’s Oct. 28-29 meetings, Timothy Geithner, then president of the New York Fed, scolded some colleagues for suggesting the Fed’s bold moves were hurting broader confidence in the economy.
“I think it’s just unfair to suggest that the actions by the Chairman and this Committee were a substantial contributor to the erosion in confidence and to uncertainty about further policy actions, even though it’s true that when we move with force and drama it has the risk of adding to uncertainty,” Geithner said.
Geithner was a key supporter of the activist measures taken by the Fed and remained so after being named Treasury Secretary once Barack Obama was elected in November 2008.
The 14 transcripts are from eight scheduled meetings and six emergency meetings of the policy setting Federal Open Market Committee, which sets the central bank’s monetary policy, including the level of short-term rates.
The transcripts do not include other meetings at which smaller groups of Fed officials, working with the Treasury Department, arranged the bailouts of bankrupt Bear Stearns, the American International Group (NYSE: AIG), and housing service entities Fannie Mae and Freddie Mac.
Nor do the transcripts include notes from the meetings at which policy makers decided to let Lehman fail.