WASHINGTON
— On the morning after Lehman Brothers filed for bankruptcy in
September 2008, most Federal Reserve officials still believed that the
American economy was growing, and that it would continue to grow,
avoiding a recession.
The
officials, gathered at the Fed’s marble headquarters for a meeting that
had been scheduled months earlier, voted unanimously not to lower
interest rates. They were not convinced the spreading financial crisis
would drag down the economy, according to a transcript of the meeting
the Federal Reserve released Friday.
But
in a pattern that repeated itself throughout the financial crisis, Fed
officials soon concluded they would need to do much more. Just minutes
after the first meeting, a smaller group of Fed officials was pulled
into a meeting where they agreed to prevent the collapse of a previously
overlooked company at the very center of the financial system, the
insurance giant American International Group.
By
the end of 2008, the Fed had reduced short-term interest rates nearly
to zero for the first time since the Great Depression, and it had become
a primary source of funding for the global financial system, providing
hundreds of billions of dollars in loans to American and foreign
financial firms.
The
14 transcripts that the Fed published Friday — covering the eight
scheduled meetings and six more emergency sessions of its Federal Open
Market Committee during 2008 —– provide a fuller picture of the Fed’s
efforts during the climax of the largest financial crisis in American
history.
The
transcripts show that the Fed’s initial response to the crisis was
constrained by a lack of understanding about the depth of the problems,
and a deeply ingrained bias to worry more about the risk of inflation
than the reality of rising unemployment. But it also shows that Fed
officials responded decisively once the crisis was upon them, perhaps
preventing an even deeper recession.
The
Fed in normal times is a powerful but somnolent institution, charged
with keeping a steady hand on the rudder of the economy. It moves
interest rates up and down to moderate inflation and minimize
unemployment. But beginning in 2007 it was forced to take on a far more
challenging role as a backstop for the global financial system. And
then, because of the depth of the resulting recession, Fed officials
also found themselves searching for new ways to revive the economy.
The
meeting on Sept. 16 was a turning point, the end of the Fed’s measured
efforts to do just enough and the beginning of its headlong rush to do
everything possible, including many things it had never tried before.
The
transcripts show that officials were uncertain whether the collapse of
Lehman Brothers would damage the broader economy. The Fed’s chairman,
Ben S. Bernanke, told his colleagues that it was clear that the economy
had entered a recession, but he still did not favor cutting rates.
“Cutting
rates would be a very big step that would send a very strong signal
about our views on the economy and about our intentions going forward,”
Mr. Bernanke said. “We should be very certain about that change before
we undertake it because I would be concerned, for example, about the
implications for the dollar, commodity prices, and the like. So it is a
step we should take only if we are very confident that that is the
direction in which we want to go.”
Other
officials also emphasized that the Fed should focus on stabilizing the
financial system, including government-sponsored enterprises, or
G.S.E.'s, like Fannie Mae and Freddie Mac, and that they were not yet
convinced that the broader economy needed help.
“My
sense is that three large uncertainties looming over the economy have
now been resolved — the G.S.E.'s and the fates of Lehman and Merrill
Lynch,” said James Bullard, president of the Federal Reserve Bank of St.
Louis. “Normally, the elimination of key uncertainties is a plus for
the economy.”
During the meeting, there were 129 mentions of “inflation.” There were just five of “recession.”
That
sense of uncertainty, which had inhibited the Fed since January, would
not long endure. In the weeks that followed, the Fed would embrace its
role as a lender of last resort, expanding its safety net not just for
Wall Street but for foreign financial firms and for makers of cars and
food and light bulbs.
And
by the end of the year, the Fed would also inaugurate its efforts to
revive the economy after the crisis, implementing the two strategies
that remain at the core of that campaign more than five years later. In
November, it would begin to buy mortgage bonds to revive the housing
market. And in December, the Fed would drop its benchmark interest rate
almost to zero, where it still rests.
The
troubles began early. As the year dawned, Fed officials did not know
that the economy already was in recession. But Mr. Bernanke and his
closest advisers were feeling nervous. They worried the Fed’s actions at the end of 2007 had been insufficient, and that tumbling stock prices were the beginning of a broader pullback in investment.
At
first Mr. Bernanke hoped to move deliberately. He orchestrated a Jan. 9
conference call during which officials agreed that action “might well
be necessary.” The next day, Mr. Bernanke delivered the same message in a
public speech, then again in Congressional testimony the following
week.
But
over the three-day Martin Luther King weekend, Mr. Bernanke concluded
that the Fed could not wait any longer. He convened a conference call at
6 p.m. Monday and won agreement to cut the Fed’s benchmark interest
rate by 0.75 percentage points. It was the largest cut in more than two
decades.
Janet
L. Yellen, then president of the Federal Reserve Bank of San Francisco,
told her colleagues at that meeting that “the risk of a severe
recession and credit crisis is unacceptably high.”
Dennis
Lockhart, president of the Federal Reserve Bank of Atlanta, said this
week that the meeting was a critical turning point. “If maybe we were a
little slow to recognize what was happening, Martin Luther King weekend
in January 2008 was a decisive point in terms of interest rate policy,”
Mr. Lockhard said.
But
Fed officials soon concluded that cutting rates was not sufficient.
Financial firms, particularly in the mortgage business, were beginning
to fail because they could not find funding. Investors had lost
confidence in their ability to predict which loans would be repaid.
Countrywide, the nation’s largest mortgage lender, had sold itself for a
pittance to Bank of America. Bear Stearns, one of the largest packagers
and sellers of mortgage-backed securities, was teetering toward
collapse.
By
early March, the Fed had reached a momentous decision. The central bank
would seek to replace private investors as a source of funding for Wall
Street firms.
On
March 7, the Fed offered firms up to $200 billion in funding. Three
days later, Mr. Bernanke secured the Fed policy-making committee’s
approval to double that amount to $400 billion, telling his colleagues,
“We live in a very special time.” Finally, on March 16, the Fed
effectively removed any limit on the funding.
It also announced that it would help to finance the rescue of Bear Stearns.
“The
Federal Reserve, in close consultation with the Treasury, is working to
promote liquid, well-functioning financial markets, which are essential
for economic growth,” Mr. Bernanke said at a hastily convened news
conference. “These steps will provide financial institutions with
greater assurance of access to funds.”
By
the end of April, the Fed had also cut short-term rates to 2 percent
from 5.25 percent the previous September —– one of the fastest falls in
Fed history.
For
a time, it seemed that the worst of the crisis was over. Officials
predicted that the economy would narrowly avoid recession. They expected
annual growth between 0.3 percent and 1.2 percent during 2008, and
faster growth in 2009, in part because they thought the Fed had done
enough to stabilize the economy.
Indeed, some Fed officials began to fret about the risk of resurgent inflation.
But,
in fact, the housing finance system continued to crumble. The
government was forced to create a rescue plan for Fannie Mae and Freddie
Mac —– which served as the central pillars of the home mortgage system —
while swearing all the while that the plan would never need to be used.
The spreading strain on other companies increased demand for the Fed’s
loans.
All
through the summer, the Fed continued to tinker with its safety net,
gradually expanding the amount of money it was pumping into the
financial system and the list of companies that it was willing to
support.
By
mid-September, it was clear that it was not enough. The crisis had
arrived, as Ernest Hemingway once wrote of bankruptcy, “Gradually. And
then suddenly.”
An Agenda? 21, Green, DESTROY AMERICA? Really! And China with AIG INSURANCE, Et Al, Etc. HANK PAULSON & obvious deals with the devil that detailed the Opium Wars Blowback!
ReplyDeleteHank Paulson and AIG and China and GOLD, what do we actually think when the proof was and is glaringly CHINESE NATIONALS paid $5K/mo and for 5Yrs, and the criminally insane are known via the Federal Reserve System (FRS)!
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