For the Fed, a Recipe for Crisis Without Leverage

When the Federal Reserve first talked about tapering last summer, investors responded like startled animals. Interest rates jumped; stocks dropped. It took months for the Fed to calm the waters by convincing investors that it had not changed its plan for short-term interest rates. It just wanted to stop buying bonds.

A new paper suggests that history is going to repeat itself.

The paper argues that forward guidance - the Fed’s efforts to explain its plans for short-term interest rates - is building instability into markets that is likely to be unleashed again whenever the Fed does hint at raising rates.

“Our analysis does suggest that unconventional monetary policies (including QE and forward guidance) can build future hazards by encouraging certain types of risk-taking that are not easily reversed in a controlled manner,” write the authors, the economists Michael Feroli of JPMorgan Chase; Anil Kashyap of the University of Chicago; Kermit Schoenholtz of New York University; and Hyun Song Shin of Princeton.

The paper was presented Friday in New York at the U.S. Monetary Policy Forum, convened by the Booth School of Business of the University of Chicago.

The Fed’s huge stimulus campaign, and recent experience, has focused a great deal of scrutiny on the stability of financial markets. Fed officials say they are watching closely - much more closely than they did before the crisis - but that they don’t see evidence that their policies are causing significant problems.

“At this stage broadly I don’t see concerns,” Janet L. Yellen, the Fed’s chairwoman, told a Senate committee Thursday, although she added that she did see “pockets” of concern, including underwriting standards for leveraged loans.

Ms. Yellen’s comments underscored that the Fed, in looking for new problems, has been particularly focused on the use of leverage, or borrowed money, which was a major factor in the financial instability during the Great Recession.

Leverage, in the standard view, is the yeast of financial instability.

The authors of the new paper fret that the Fed is fighting the last war.

“The absence of leverage may not be sufficient to ensure that monetary policy can disregard concerns for financial stability,” the paper says. “It does not follow that future bouts of financial instability will operate only through the same mechanism that was present in 2008 and 2009.”

The focus of the paper, which also discusses the prospective effects of an exodus from emerging market bond funds, is a sketch model of how the Fed’s actions may produce instability without a buildup in leverage:

Investors move in herds. Even without significant leverage, those movements can build sharply and recede sharply. Monetary policy is a significant influence on those movements. As a result, changes in monetary policy can produce volatility.

The practical implication is that the Fed, when it begins to retreat, could find that financial conditions tighten much more quickly than it considers desirable. Moreover, the authors argue those changes could affect the broader economy, even without traditional mechanisms like bank failures, by raising interest rates.

“Stimulus now is not a free lunch,” the paper says. “It comes with a potential for macroeconomic disruptions when the policy is lifted. Perhaps the domestic macroeconomic fallout from exit will be as gentle as was the impact from the 2013 ‘taper tantrum.’ However, such a benign outcome is not guaranteed.”

Why College Supply Matters

Anthony Lanzilote for The New York Times Monroe College, a for-profit college in the Bronx.

Most of the debate over America’s stagnant college graduation rates focuses on things that affect demand, like college affordability and the availability of financial aid. We ponder whether high school graduates are prepared for a college education.

There is a missing link in the analysis, however: supply.

Most discussion about our dismal educational attainment implicitly assumes that if the demand for higher education materializes, public and nonprofit colleges and universities will step up to meet it. Recent research has shown, however, that this is not generally the case. There is pretty good evidence that shortfalls in the supply of higher education slots have constrained college completion.

John Bound of the University of Michigan and Sarah Turner at the University of Virginia tracked college education through the second half of the 20th century. They found that when states had a large college-age population, public spending per student declined and graduation rates suffered.

“Reduced resources per student following from rising cohort size and lower state expenditures are likely to have significant negative effects on the supply of college-educated workers entering the labor market,” they concluded.

Their analysis is consistent with the earlier work of David Card at the University of California, Berkeley, and Thomas Lemieux of the University of British Columbia that found a negative link between the size of the college-age population and the college enrollment rate, suggesting rationing in the supply of higher education.

“Students in larger cohorts may be ‘crowded out’ of college if the capacity of the education system does not expand as rapidly as the student-age population or if the system only partially adjusts to a temporary bulge in enrollment,” Professors Card and Lemieux wrote.

Most economists agree that slipping college graduation rates are handicapping the American economy, affecting everything from technological progress and growth to income inequality.

Professors Card and Lemieux have suggested that declining college graduation rates explain to a large extent the fast growth of the gap between the wages of workers with a college degree and those without one in the final decades of the 20th century - which crimped the supply of highly educated workers.

Nicole Fortin of the University of British Columbia found, for instance, that state funding for higher education directly affects the college wage premium: in states like California, where appropriations per college-age person declined in the 1980s, tuition rose, enrollment rates fell and the wage premium widened in the 1990s. In states like Florida, where the appropriations kept up with the college-age population, the wage gap rose little.

My column this week suggested that for-profit colleges have become an indispensable part of the higher education supply. They grant about one in five associate degrees and 7 percent of the nation’s bachelor’s degrees.

If my inbox is any indication, many disapprove of this trend. Some would prefer to see the for-profit sector disappear.

The question, then, is, what will take its place? Facing tighter and tighter budgets, the public colleges and universities that supply about two-thirds of the nation’s college degrees are in little shape do it. If we are to increase graduation rates, somebody must.

What Ukraine Needs for Sustained Prosperity

Louisa Gouliamaki/Agence France-Presse â€" Getty Images With nationalist chants and songs in Independence Square in Kiev on Wednesday, Ukrainians awaited word from their country’s new leadership.

Peter Boone is chairman of the charity Effective Intervention and a research associate at the Center for Economic Performance at the London School of Economics. He is also a nonresident senior fellow at the Peterson Institute for International Economics. Simon Johnson is a professor at the M.I.T. Sloan School of Management and former chief economist at the International Monetary Fund.

This is an important and hopeful moment for Ukraine. While we are optimistic that it can be seized, with greater prosperity for millions of people, Ukraine has faced similar hopeful moments, and subsequent disappointment, several times in the last 20 years. This time will not be different unless Ukraine’s new rulers make a definite break with the established ways of its economic and political elite.

Without real change in how Ukrainian governance operates, the current optimism will soon return to cynical pessimism. The weakness of Ukrainian democracy has been fully exposed by events on its Independence Square (Maidan, in Ukrainian) in recent weeks. To be blunt, Ukraine needs to become much less corrupt. (According to Transparency International, Ukraine is one of the most corrupt countries in the world.)

In 1991 Ukraine’s independence seemed to promise great things - just as the breakdown of the Soviet bloc offered opportunities for countries like Poland, which embarked on a remarkable economic recovery underpinned by genuine democracy. In Ukraine, the economy started out about the same size as Poland’s but now is half the size. (Ukraine has 45 million people and a gross domestic product of around $200 billion, depending on which exchange rate you use. Poland has nearly 40 million inhabitants and a G.D.P. that is close to $500 billion.)

In 1994 the election of Leonid Kuchma offered the opportunity for a breakthrough - an argument we made at the time (with Anders Aslund) while working with the government. Sadly, the right policies were never pursued, becoming lost in a tangle of incompetence, corruption and nepotism.

The Orange Revolution of 2004-5 constituted a remarkable round of popular protest, which brought Viktor Yushchenko to the presidency, but again the results were disappointing. Viktor Yanukovych was elected president in 2010 and the disappointment only grew.

Don’t misunderstand us - the underlying economy has changed and grown over the last two decades, a point made by Mr. Aslund. Ukraine undoubtedly has the human talent and physical capital (buildings, roads and other infrastructure) to become a much more prosperous nation. But the toxic legacy of the Soviet regime remains evident with entrenched corruption, highly distorted energy prices and politicians who focus mostly on playing off potential European, American and Russian supporters.

Maidan has come to represent a group of people rising against corruption and willing to give their lives for a better-run country. This is a powerful instrument if it can be harnessed and maintained.

Nations can rid themselves of substantial corruption if there is a will and sufficiently striking action by leaders - Hong Kong, in the 1970s, and Georgia more recently, spring to mind. Every Ukrainian politician and oligarch should fear such an uprising aimed at checking corruption.

Ukraine needs an anticorruption commission, run by the people who made their names on the streets, as a watchdog against bribery, official theft and abuse of power by private individuals. It should produce detailed and completely transparent reports to the nation.

If the people running this see their role and legacy as standing up for those who died in these protests, the commission could become a powerful constraint on powerful elites. It could also recommend specific means to reduce corruption over time, making all kinds of transactions much more transparent and simplifying the tax system.

At the same time, Ukraine needs to reduce its dependence on Russia’s largess. The continuing contest between Europe, the United States and Russia for influence in Ukraine has not been in the interest of most Ukrainians.

Large implicit and explicit subsidies from Russia have often been associated with corruption in Ukraine. This is bound to occur when valuable goods, such as gas and oil, are sold at far below market prices, with politicians controlling who gets to pocket the benefits.

The implication is straightforward. Ukraine should promise to pay roughly market prices for Russian energy, while receiving transparent payments at fair prices for transport of gas across its pipelines (a major source of revenue and corruption).

The Yanukovych regime has left national finances in a dire state. The currency, the hryvnia, must be allowed to depreciate substantially; this will stem the loss of foreign exchange reserves, encourage exports and lower the country’s current account deficit. But this step, combined with the rising price of Russian energy and needed budget cuts, will be painful.

The wave of support that brings the new Ukrainian government to power will quickly be lost if the new leaders are blamed for the problems created by Mr. Yanukovych. It is critical to make these most difficult and painful decisions quickly, rather than draw them out over many months or years under the new leadership.

In this context, the International Monetary Fund and other nations need to work out a program with Ukraine in which the government is well financed and has a reasonable debt payment schedule over many years. This does not mean Ukraine should get new money to finance large budget deficits. Previous large I.M.F. loans to Ukraine, as well as bilateral loans, were squandered, leaving behind official debts, relatively low reserves and still a large budget deficit.

Ideally, apart from long-term investment financing, the Ukrainian budget should be balanced.

The I.M.F. should extend the maturity of existing debt on a path that is sustainable. Some funds could be locked into foreign exchange reserves at the central bank if this is needed to restore confidence, but there is no point in offering larger loans so that more money can be spent on subsidies, or to avoid needed spending cuts.

By harnessing the powerful anticorruption forces created at Maidan, ending the country’s debilitating dependence on foreign largesse, putting its public finance on a sustainable footing and letting popular opinion choose a path between Europe and Russia, Ukraine might get a chance to fulfill the hopes expressed by so many when the Soviet Union collapsed, a long time ago.

The Promise and Pitfalls in a Tax Reform Plan

Jared Bernstein is a senior fellow at the Center on Budget and Policy Priorities in Washington and a former chief economist to Vice President Joseph R. Biden Jr.

Representative Dave Camp, the Michigan Republican who is chairman of the Ways and Means Committee, released an ambitious tax reform proposal on Wednesday.

The bill has some worthy aspirations, and he bravely throws some treasured loopholes, like “carried interest,” by the wayside. The plan significantly lowers the cap on the amount of mortgage interest that homeowners can deduct (a tax break that skews heavily toward the wealthy).  It includes an excise tax on large banks to offset the implicit subsidy these institutions enjoy by dint of being too big to fail.  It pegs tax brackets to a price index that grows more slowly, meaning more income will pass into higher brackets than is now the case.  Though the politics of tax reform is extremely cramped â€" even some of Mr. Camp’s fellow Republicans are saying his proposal isn’t going anywhere â€" it may prove to be a useful starting point for negotiations down the road.

But in its current incarnation, the plan is fundamentally flawed. First, it claims to be revenue neutral, but achieves that goal only with timing gimmicks that ensure that its revenue neutrality will not last. Second, revenue neutrality is itself a recipe for an unsustainable budget path.  Our demographics alone, not to mention growing challenges like climate change, imply future demands on government programs that clearly show neutrality to be a misguided guidepost for tax reform.

Mr. Camp’s plan seeks simplicity, a venerable goal, by reducing the current set of seven income-tax brackets (ranging from 10 percent to 39.6 percent) down to two (10 percent and 25 percent), although he includes a 10 percent surcharge on certain income sources for the top 1 percent of earners â€" again, not something you’d expect from his side of the aisle these days.

Two points here.  First, bracket complexity is largely an illusion.  Regardless of the number of brackets, it’s simple these days to figure out what you owe, once you define your taxable income, and that’s where the complexity comes in.  And from what I can see, there’s still lots of that sort of complexity in the Camp plan (for example, see the definition of income that gets hit with the surcharge: adjusted gross income minus many different income sources). You don’t simplify the code by reducing the number of brackets; you do so by not favoring one type of income over another.

Second, the word on the street was that Mr. Camp was working for years to achieve revenue neutrality while sticking with the two brackets of 10 and 25 percent.  He couldn’t do it, just as Mitt Romney couldn’t do it because the math doesn’t work.  Again, give the man credit for not pretending otherwise (though the scorekeepers would have busted him on this point).  So, if you tout up the new Camp surcharge and the 3.8 percent surcharge for the Affordable Care Act (a provision he appears to be keeping), you’re back to a top rate of 38.8 percent.

We don’t know yet about distributional results in terms of winners and losers relative to the current system, though Mr. Camp argued on the Op-Ed page of The Wall Street Journal on Wednesday that his plan would lower middle class tax liabilities by $1,300, and asserted at a news conference that it would be distributionally neutral. It will take analysis by outside scorekeepers to see how close he came to that goal. His proposed changes to the earned-income tax credit â€" a strongly pro-work, anti-poverty wage subsidy â€" look particularly worrisome.

There are other notable features, including a reduction in the top corporate rate from 35 percent to 25 percent and a shift to a territorial system for multinationals, something Mr. Camp has long championed but a measure that I’ve long pointed out is an incentive for more offshoring of production and jobs and is thus a significantly worse option than the administration’s idea for a minimum tax on foreign earnings.

But the real problem is on the revenue side.  There are far too many timing gimmicks that temporarily increase tax revenues in the scoring window (the first 10 years) to create the impression of lasting revenue neutrality and positive economic incentives.  But once these gimmicks expire, the plan will collect significantly less revenue, leading to all kinds of headaches for both deficits and growth:

- Mr. Camp proposes changes to the way retirement savings are taxed so that, compared with the current system, his plan will generate higher tax liabilities and more revenues in the near term and lower liabilities in the long term. That is, by providing retirement savers with an incentive to move into Roth-style IRAs, they’ll pay more in taxes in the first 10 years of the budget window. But those revenues will not be there in the next decade, while his lower rate structure will still be locked in.

-The corporate rate is phased in slowly, so revenue losses occur outside of the budget window.

-The plan eliminates accelerated depreciation on equipment purchases by businesses, a move that just shifts timing of tax receipts to now versus later.

-There’s a one-time transitional tax on deferred foreign earnings as part of the territorial package.

In his Wall Street Journal commentary, Mr. Camp promotes the positive growth and job impact of his plan as scored by the nonpartisan Joint Tax Committee.  But that’s based on a 10-year score wherein lower tax rates, by assumption, increase growth, jobs and labor supply.  O.K., but what about the following 10 years, when tax payments that were pulled forward are no longer there to help offset the revenue losses from the lower rates?  At that point, either we cut spending or raise taxes, or structural deficits will return.  And if it’s the latter, those growth assumptions will fizzle.

So there are some good ideas in this proposal, along with some rarely seen Washington courage for which Mr. Camp deserves credit, though we need to see the distribution results to get a better read on the impact on households at various income levels, with a particularly careful eye on low-income working parents.  But if history is a guide, once we engage in major tax reform, it will be a long time before we get back to that well.  We therefore cannot proceed with a plan that both fails to raise the revenue we’ll need and gets too much of its revenue from timing gimmicks.

The Affordable Care Act’s Multiple Taxes

Casey B. Mulligan is an economics professor at the University of Chicago. He is the author of “The Redistribution Recession: How Labor Market Distortions Contracted the Economy.”

The Affordable Care Act contains at least two economically distinct taxes on labor market activity. Even the experts on the law have failed to recognize all of them.

The Affordable Care Act tries to make health insurance affordable by offering means-tested subsidies and tax credits to households so they can make their payments for monthly health insurance premiums and out-of-pocket health expenses like deductibles and copayments for medical services.

This assistance is means-tested because higher-income households get less assistance than lower-income households. As a household’s income rises, it has to pay more for the same coverage. As a matter of economics, it wouldn’t have been much different if the law had given assistance to all households and then paid for it with a new income tax that was capped once household income hits 400 percent of the federal poverty line.

Naturally, income taxes discourage people from doing the things that create income. This is not to say that everyone responds to every tax, just that the average result of an additional income tax is less income.

Economists have long understood and publicized the implicit income taxes that come with attempts to make health care affordable. As my fellow Economix blogger Uwe Reinhardt put it 20 years ago (in an article with Alan B. Krueger) about one specific subsidy plan, health insurance premium assistance “would present millions of low-income American families with total marginal tax rates in excess of 75 percent.” Professor Reinhardt also noted recently that the marginal tax rate implicit in any particular health insurance proposal depends very much on the features of that plan.

The Congressional Budget Office also highlighted this issue as the Affordable Care Act was going through Congress. Daniel P. Kessler, a Stanford professor, also discussed it in a commentary in 2011.

Under the Affordable Care Act, only a small minority of workers is expected to get subsidized coverage. So economists concluded that aggregate labor market effects of the new law would be minimal.

I would agree if the implicit income tax were the only new tax on labor market activity in the new law. But there’s more: The Affordable Care Act also contains a new implicit tax on employment that affects far more people than its implicit income tax does.

Income taxes and employment taxes are not the same, because the income tax is based on income and the employment tax is based on employment. Two households with the same family structure (in number and age of family members) and annual income who live in the same county will not necessarily get the same assistance from the Affordable Care Act. The household that is employed more months of the year is likely to get less assistance (and maybe no assistance) from the new law, because the law requires that, during the months that they are employed, full-time workers get health coverage from their employer before they turn to the new health insurance marketplaces for federal government subsidies.

To put it another way, even if the health insurance subsidies in the Affordable Care Act had been a specific dollar amount that was not phased out with household income, the law would still act as a tax on employment because most workers could not get the assistance during the months they were at work.

This new implicit employment tax will apply to tens of millions of workers who are offered health insurance on their job and to millions of non-employed persons who are considering a position that offers coverage.

(The new employment tax also changes the types of jobs that are created and accepted by workers, but this effect does not prevent the law from reducing employment, as Trevor Gallen and I explain).

As far as I know, before this month the only place that one could read about the Affordable Care Act’s new employment tax was in this paper by David Gamage, in posts I have written for this blog, in my 2012 book or in a 2013 paper. Even though the consequences of the law have been debated at least as far back as 2009, the law’s advocates have yet to acknowledge the new implicit employment tax, let alone estimate the number of people who will face it.

But in a recent paper, the Congressional Budget Office has joined me in explaining that it’s not just the implicit income tax that will contract the labor market. As the paper puts it, “The loss of subsidies upon returning to a job with health insurance is an implicit tax on working,” adding that the effect of the new tax is “similar to the effect of unemployment benefits” (see Page 120).

Once we consider that the new law has an employer penalty, too, the labor market will be receiving three blows from the new law: the implicit employment tax, the employer penalty and the implicit income tax. Regardless of how few economists acknowledge the new employment tax, it should be no surprise when the labor market cannot grow under such conditions.

Putting Economic Data Into Context

Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of “The Benefit and the Burden: Tax Reform â€" Why We Need It and What It Will Take.”

In last week’s post, I made reference to some 210-year-old budget data that required a contextual adjustment. Calling a $50,000 expenditure in 1803 a large number wouldn’t have registered with readers and made my point unless it could be adjusted in some way to make it comparable to an equivalently large expenditure today.

This led to some discussion with my editors about the best way to do this, since there are no rules to explain exactly how and when this should be done. Unfortunately, even the experts disagree, making the final decision essentially a judgment call.

Not surprisingly, economic historians have been wrestling with this problem for years and have produced an excellent calculator for converting historical data into contemporary figures. The site is called Measuring Worth, and it is the one I use most of the time.

Of course, the primary adjustment that economists and journalists often must make is for prices. Inflation and deflation are facts of life. And especially over long time periods, it would be grossly deceptive to imply that a dollar in the past has the same relative value as a dollar today. Adam Smith made this point in 1776, saying that the labor content of goods was the best measure of their relative value.

Today we use price indexes to convert monetary values from the past into “real” values today. The best-known such index is the Consumer Price Index published monthly by the Bureau of Labor Statistics. For those interested only in a simple inflation adjustment, the bureau maintains a useful calculator.

While adjusting prices for inflation is almost always better than not, it is often far from sufficient to properly convey context and orders of magnitude. Moreover, there are many different price indexes used for different purposes. Another well-known index is the Producer Price Index, which measures production inputs. It sometimes forecasts C.P.I. inflation and sometimes doesn’t. The Federal Reserve tends to favor something called the Personal Consumption Expenditures price index, produced by the Commerce Department.

Unfortunately, at any given moment, these indexes may be giving different signals, which leads to many Wall Street economists trying to read the tea leaves, especially insofar as they give clues to Fed policy. And there are still deep theoretical questions about how to measure price changes that the economics profession has not resolved.

For example, should the prices of assets like stocks be incorporated into general price indexes? Do certain commodities like gold give accurate advance warning as to changes in the price level? Is the price of housing best measured by home prices or the equivalent rental value? How can new products be incorporated into price indexes so as to maintain historical consistency?

Generally speaking, journalists need not concern themselves with such questions, which are best left to theoretical economics. What they need is a quick way to decide what numbers need some sort of adjustment, what that adjustment should be based on context, and a reasonably accurate and rapidly accessible means of doing so.

The area where this is the biggest problem is probably large budget numbers. The raw data is almost universally useless. Saying that the budget deficit was $680.3 billion in fiscal year 2013 tells the average person absolutely nothing of value. It’s just a large number that sounds scary. It would help to at least know that it is down from $1.087 trillion in 2012 and a peak of $1.413 trillion in 2009, but that’s not entirely adequate.

Simply adjusting the deficit for inflation would show that the deficit has fallen from $1.541 trillion in 2009, since there has been inflation in the meantime. But it makes no sense to compare the federal budget to a family budget, which is what the Consumer Price Index is based on. One needs to use a broader index, like the gross domestic product deflator, which measures price changes throughout the entire economy.

One problem with only adjusting for prices, regardless of index, is that there are real changes going on in the economy simultaneously - productivity, wages and wealth generally rise over time. These sometimes need to be accounted for to give proper context.

For large numbers, the percentage of the gross domestic product is both the easiest to find and best to use. Organizations like the Congressional Budget Office routinely calculate budget data as a share of the gross domestic product. They show that the deficit fell to 4.1 percent of the G.D.P. in 2013 from 6.8 percent in 2012 and from 9.8 percent in 2009. The effect is to show a much larger improvement than one would sense only from the raw numbers, because the G.D.P. grew to $16.8 trillion in 2013 from $14.4 trillion in 2009.

Since the “burden” of the debt basically falls on the entire economy, the debt-to-G.D.P. ratio is generally considered the best measure of that burden. It also facilitates international comparisons without having to worry about exchange-rate adjustments.

Incidentally, international price comparisons can be especially tricky because current market exchange rates may not accurately reflect relative values or standards of living. Economists generally prefer to use something called “purchasing power parity,” but such data is not always easy to come by. The Economist magazine tries to do this in an easily understandable way by calculating the equivalent price of a Big Mac throughout the world.

There is much more to say on this topic. I recommend an essay on the Measuring Worth website that discusses different measures of value over time and how they materially affect our perceptions. There are also new statistical measures coming online that may provide even better data, like the Billion Prices Project from M.I.T., which gathers price data in real time directly from store price scanners.

This is an area where trial and error is the best strategy. The important thing is to make an effort to provide proper context where it appears necessary and not to simply ignore the problem.

Lessons From the Recovery Act

Jared Bernstein is a senior fellow at the Center on Budget and Policy Priorities in Washington and a former chief economist to Vice President Joseph R. Biden Jr.

It was five years ago this month that the new president signed the $800 billion Keynesian stimulus package, also known as the Recovery Act.  A few weeks later, he put Vice President Joseph R. Biden Jr. in charge of overseeing its implementation.  As the vice president’s chief economist at the time, as well as a member of the economics team that helped to shape the package, I was an active participant in this important chapter of our economic history.

Part of that is by way of full disclosure.  Though I’d argue that what follows is objective and critical, I clearly believe, as do most economists, that stimulus policy â€" wherein public spending ramps up temporarily to offset a private-sector contraction â€" is an essential weapon against recession.  I also agree with various nonpartisan analysts that the Recovery Act helped to increase gross domestic product and job growth significantly, and to reduce the number of the unemployed.

But I come not so much to praise what we did as to ponder what we might have done differently.  Are there lessons that can be learned that we can use the next time we hit a downturn?  In that spirit, I’ll take the very un-Washington step of pointing out some things we could have done better.

A Deeper Diagnosis: While the lag in real-time data meant that we didn’t know the extent of the economic damage when we began working on the stimulus in late 2008, it was widely known that the recession was caused by the implosion of a housing bubble that was inflated by reckless finance (remember, Lehman Brothers failed in September 2008).

Not all recessions are created equal, and we needed to be more mindful of the possibility that a bursting housing-debt bubble had uniquely threatening characteristics relative to, say, an equity bubble (like the dot-com bubble that led to the 2001 recession) or a supply-shock recession (for example, the disruption of a critical input like oil).

The “mark to market” equity case recognizes asset losses much faster than the “extend and pretend” debt bubble case.  The fact that your dot-com shares go from valuations of $1,000 on Friday to $1 on Monday rips off the Band-Aid in a way you don’t see when banks can dither on marking down the balance-sheet value of their nonperforming loans.  The latter means much more stress on the financial system and thus a longer, deeper recession that must be met by a larger, longer response.

The loss of wealth (in home equity) from a bursting housing bubble also had much more pervasive negative impact on demand, as homeowners, unlike owners of large stock portfolios, are spread throughout the income scale.

To be clear, I believe the Obama administration got the largest possible stimulus we could have out of Congress, well beyond either any past such measures or what had been on the table in the months before the president took office.  But as I stress below, it should have been viewed as the first part of what might, based on the diagnosis above, have to be a multistep package.

Don’t Pivot Too Soon: A deeper understanding of the economic damage should have prevented the precipitous pivot away from stimulus toward deficit reduction.  A combination of politics (our sense that the public disliked the growing deficit a lot more than they liked the stimulus) and misguided economics (the fear that debt markets would respond to the deficit by pushing up interest rates) contributed to a desire to see an economic recovery before it was really there.  We talked about “green shoots” back then, and I recall one listener suggesting to me that if that’s what we saw, we must be “smoking green shoots.”

By the way, in those days I learned the power of the single worst analogy I know: “just as families have to tighten their belts in tough times, so does the government.”  It’s not just that this is wrong; it’s that it’s backward.  When families are tightening, government (including the Federal Reserve) must loosen, and vice versa.  But the phrase, uttered by no less than the president himself at times, makes so much folksy sense that it too infected the policy and precipitated the pivot.

Be More Direct: About one-third of the stimulus package went to tax cuts.  There’s an excellent political rationale for that apportionment, but particularly given the diagnosis noted above, tax cuts’ bang-for-buck in terms of jobs is less than optimal.  First, for the cuts to stimulate the economy, recipients have to spend the extra money, not save it.  In a deleveraging cycle, that’s a heavier lift.  Second, when they do spend the money, they need to spend it on domestic goods.  So there’s a lot of potential leakage.

It’s also the case that one-quarter of the tax cuts went to relief from the alternative minimum tax that would have happened anyway, so that part wasn’t even stimulus (which by definition means new spending or tax cuts).

Instead of crossing your fingers and hoping that tax-cut recipients spend the cuts on domestic goods, it’s smarter to fund as much direct (e.g., infrastructure) and near-direct (e.g., state fiscal relief) job creation as you can.

Go Back to the Well Until the Benchmarks Tell You Otherwise: A correct diagnosis would have predicted that more stimulus was needed than the Recovery Act alone.  In fact, as a recent White House analysis reveals, there were many more trips back to the stimulus well than has been recognized by critics of this point.  The administration points out that another $670 billion of fiscal support followed the Recovery Act, but here again, too much (over two-thirds in total; half if you leave out the A.M.T. and other expected extensions) went to tax cuts. That’s an economic critique, though; the politics obviously go the other way.

In terms of learning from mistakes, however, here’s a very important idea for the next time this comes up: Just as the Federal Reserve links its monetary stimulus to benchmarks like inflation and unemployment, so should Congress with fiscal stimulus.  In fact, doing so would avoid the terribly wasteful and inefficient situation we’ve been in, where the impact of the Fed’s monetary tailwinds have been partly offset by fiscal headwinds.

Better Messaging: We started off on the seriously wrong foot by kicking the ball into our own goal with the infamous Romer-Bernstein graphic that was way too optimistic about the path of unemployment (see Figure 1, but also see Endnote 1, which I dearly recall).  To be clear, what Christina Romer and I did was to calculate the “deltas” â€" the change in gross domestic product, jobs, and the unemployment rate â€" and attach those to the far-too-sunny consensus forecast at the time.  That’s not an excuse: we got the deltas right, but so what?  By attaching them to the consensus forecast, we made it much harder to defend the stimulus from the start.

Even so, it may well be the case that even Scarlett Johansson couldn’t have successfully sold the package (though it would’ve been cool to try).  Unlike economists, actual people don’t do “counterfactuals” as in, “yes, unemployment’s up; but it would have been up more absent the stimulus.”  It’s also very hard to convince them that a job that was there yesterday and will still be there tomorrow was “saved” by the Recovery Act.

I can tell you that part of what was going on in my head was that people deserved to know what they were getting for their $800 billion, and that gave rise to, among many other efforts, a series of posts we called Recovery Act in Action.  I don’t think they … um … won the day, but neither did numerous site visits by the administration’s most principal players.

What we should probably learn here is that we were thinking about this the wrong way.  Instead of “we’re making things better!” when we were making them less bad, perhaps a more effective message would have been: “Folks, it is hard to overestimate how damaged our economy really is.  Because of our actions, and those of the Fed, we’ve prevented disaster, but we’re a long way from recovery.  That’s going to take a long time, and to be absolutely honest with you, things are going to get worse before they get better.  The Recovery Act will likely have to be the first step in a multistep attack on this huge hole that’s been blown in our economy.  But if we follow this course and stick with it for as long as need be, eventually, we will find our way to a robust recovery.  And through that robust recovery, we will replenish the coffers that we’ve emptied to fill the hole.”

I’ve focused on what we could have done better, in part because there are already compelling, detailed versions of what we did right.  But before I close, a quick word about a positive aspect that doesn’t get enough attention and in the spirit of learning for next time, is essential: the Recovery Act was well and cleanly implemented.  Efficiency and oversight were well balanced; in fact, I’d argue that the transparency and oversight structure should serve as a model for future stimulus programs.  I can also tell you that from where I sat, a big part of the credit for the act’s successful implementation should go to Vice President Biden and his chief of staff, Ron Klain.

Finally, by talking about “learning for next time,” I’m implying that the loudest opposition voices against the Recovery Act in particular and Keynesian stimulus in general will be drowned out by the reality that these measures helped a great deal.  My hope here is that by dint of lessons learned, next time it will work even better.

Local Policies That Work for Workers

Nancy Folbre is professor emerita of economics at the University of Massachusetts, Amherst.

For years, activists who pushed hard for local policies to improve low-wage jobs feared that their small successes would have only marginal effects. But now, as the debate over proposed increases in the federal minimum wage heats up, their grit and determination may pay off.

In her essay in a new edited volume, “What Works for Workers?,” Stephanie Luce points out that more than 125 living-wage ordinances have been put into place since Baltimore first implemented one in 1994. While the number of workers directly affected has been relatively small, no ill economic effects have been documented, and the political demonstration aspect of it has been heartening.

The patchwork of local victories has educated voters about the issues, helping explain why a poll conducted by CBS News in mid-January found that 72 percent of Americans favor raising the federal minimum wage to $10.10 an hour. The patchwork also created valuable points of comparison for assessment of economic consequences.

Variations in state policy provided a natural experiment, making it possible to evaluate employment growth among low-wage companies close to state boundaries where the minimum was raised on one side but not the other. The results showed no negative employment impacts. Analysis of the same variations reveals significant reductions in employee turnover in the first nine months after a minimum-wage increase, a factor that increases efficiency and helps compensate for increased costs.

In 2004, San Francisco implemented a generous citywide minimum wage (currently $10.74 an hour). Yet as a recent article in Bloomberg Businessweek points out, local economic growth hasn’t suffered. Both overall private employment and employment among food service workers grew more rapidly there than in neighboring counties between 2004 and 2011.

In a powerfully symbolic move, Gap Inc. announced last week that it was increasing its national pay scale to bring it in line with the minimum wage in San Francisco, where its headquarters are.

San Francisco has long been in the vanguard of progressive local policy efforts, analyzed in considerable detail in a new book, “When Mandates Work” (the basis for the Businessweek article cited above).

In addition to the citywide minimum wage, an innovative quality standards program for employees at San Francisco International Airport in 2000 increased wages and increased education and training requirements to improve airport security and customer service. The sharp reductions in turnover that resulted make the program an exceptional exemplar of “high road” employment strategy.

The city also took steps to improve a more personal sector of the economy, using Medicaid funds to provide home care for more older people and individuals with disabilities. It did this while creating an institutional framework allowing home care workers to unionize, earn higher wages and gain access to health insurance. A similar framework has now been adopted in 12 other states, including Oregon and Washington.

Negotiations with real estate developers in the city also moved in a creative direction, with community benefit agreements that established legally binding conditions for the redevelopment of the Hunters Point Shipyard and Candlestick Point setting targets for affordable housing and job creation.

Other innovations pioneered in San Francisco include domestic partner benefits, an ordinance on paid sick leave, health spending requirements that anticipated some features of the Affordable Care Act, and improved enforcement of labor standards.

“San Francisco may be unique in the unusual scope of these employer mandates,” explain the book’s editors, Miranda Dietz, Ken Jacobs and Michael Reich. “But it is not unique in the economic conditions that created the need for the policies or in the efforts of labor and community coalitions and local governments to address them.”

Indeed, Mayor Bill de Blasio of New York City, who campaigned on his commitment to reduce inequality, may want to look west. The Bay Area has set an impressive example.

In a Dark Year, a Lighter Side at the Fed

The Federal Reserve’s 2008 transcripts are shot through with dark and corny â€" very dark, and very corny â€" humor.

Timothy F. Geithner, then the president of the New York Fed, gets a laugh for describing a discussion as being “like pro wrestling.” Ben S. Bernanke, then the chairman, admits that he can play “Jekyll and Hyde quite a bit and argue with myself in the shower and other places.” After a report shows the economy growing at a 2 percent annual pace, he also gets a laugh for quipping that Republicans shold run on the slogan, “The Economy: It Could Be Worse.”

The humor can be grouped into a few categories. First, the sardonic asides of policy makers trying to prevent the financial markets and whole economy from going belly up. Second, the inquests of the Dallas Fed president, Richard Fisher. Third, a long discussion of canaries in coal mines. And finally, the blackly humorous anecdotes that Fed officials collect from local business leaders. Here’s a small selection.

A Dismal Science

CHARLES PLOSSER: Listening to the staff discussion I have certainly come to understand why everyone continues to believe that economics is a dismal science.

+++

TIMOTHY F. GEITHNER: Let me just start by saying it’s not all dark.

FREDERIC MISHKIN: Don’t worry, be happy?

MR. GEITHNER: I’m going to end dark, but it’s not all dark.

+++

MR. MISHKIN: I think we’re all trying to be cheery here. It reminds me a little of one of my favorite scenes in a movie, which is Monty Python’s “Life with Brian.” (It is actually “Life of Brian.”) I remember the scene with them there all on the cross, and they start singing, “Look on the Bright Side of Life.”

+++

DONALD KOHN: Anyone who thinks he or she understands what’s going on is either a lot smarter than I am or delusional â€" or both.

+++

JANET L. YELLEN: In the run-up to Halloween, we have had a witch’s brew of news. Sorry. The downward trajectory of economic data has been hair-raising â€" with employment, consumer sentiment, spending and orders for capital goods, and home building all contracting â€" and conditions in financial and credit markets have taken a ghastly turn for the worse.

From Mr. Fisher

I searched the newspapers for something to read that didn’t have anything to do with either a rogue French trader or market volatility or what the great second guessers were blabbing forth at the chat show in Davos. And in doing so I happened upon a delightful article. I hope you saw it in the Saturday New York Times on the search for a motto that captures the essence of Britain. My favorite was nemo ne inclune lacet, which very loosely translated, I think, means “never sit on a thistle.” Well, that’s where I am.

+++

I know we are suffering because our deputy secretary here sitting to your right, Mr. Chairman, just gave me a candle and had me blow it out with no cake attached.

+++

My thought is that [this policy] encourages the financial markets. They’re not going to be satisfied. I said this last time. It’s Jabba the Hutt. They will keep asking for more and more. We have to quit feeding them. I’m in a pizza mode, by the way, in this conversation. I do have a suggestion, however.

MR. MISHKIN: You mean Pizza the Hutt, not Jabba the Hutt.

MR. FISHER: Pizza the Hutt, that’s right.

+++

One of my tutors at St. John’s had a python named Julius Squeezer.

+++

By the way, I notice that these little bottles of water have gotten smaller â€" this will be a Visine bottle at the next meeting.

The Canary in the Coal Mine

MR. MISHKIN: I do not put a lot of stock in consumer surveys. But I tend to look at financial markets as being the canary in the coal mine. Though being a New Yorker, I actually have been in a coal mine - at the Museum of Science and Industry in Chicago. It’s really cool. All of you should go there someday when you go visit Charlie.

RANDALL KROSZNER: But he has never seen a canary.

MR. MISHKIN: I have seen a canary. But the key is that the canary has not keeled over.

+++

MR. GEITHNER: The transcript says, “Mishkin says canary wheezing but hasn’t keeled over.” I support Alternative B. I think you could frame this as a modest recalibration of policy with a hawkish soft pause.

MR. BERNANKE: And a wheezing canary.

MR. GEITHNER: I don’t think the canary is wheezing.

+++

MR. MISHKIN: If the canary starts to look as though it is keeling over, we have to move very quickly, and so I am going to watch that canary very, very carefully.

MR. FISHER: Before the python gets it.

Regional Reports

MR. FISHER: My biggest disappointment, incidentally, was that the one bakery that I’ve gone to for 30 years, Stein’s Bakery in Dallas, Texas, the best maker of not only bagels but also anything that has Crisco in it, has just announced a price increase due to cost pressures.

+++

MS. YELLEN: A banker in my district who lends to wineries noted that high-end boutique producers face a distinctly softening market for their products, although sales of cheap wine are soaring.

+++

MR. FISHER: The one ray of sunshine that I was able to find is that one large law firm, Cravath, has announced that it is not increasing its billing rates in 2009, and other law firms are actually planning to respond by cutting their billing rates. One woman whom I know summarized it this way: “This is the divorce from hell. My net worth has been cut in half, but I am still stuck with my husband.”

+++

MS. YELLEN: East Bay plastic surgeons and dentists note that patients are deferring elective procedures. Reservations are no longer necessary at many high-end restaurants. And the Silicon Valley Country Club, with a $250,000 entrance fee and seven-to-eight-year waiting list, has seen the number of would-be new members shrink to a mere 13.

+++

MR. MISHKIN: I am very skeptical of [household surveys] because they tend to react very much to current conditions. Also, if you ask people what TV shows they are watching, they will tell you that they are watching PBS and something classy, but you know they are watching “Desperate Housewives.”

MR. BERNANKE. What is wrong with “Desperate Housewives”?

Live Blog: Inside the Fed’s 2008 Proceedings

Alex Wong/Getty Images Ben S. Bernanke testifying before Congress on Sept. 24, 2008, at the height of the financial crisis.

On Friday, the Federal Reserve released the transcripts of its policy meetings of 2008, the year that began with little hint that a recession and a world financial crisis were unfolding. The transcripts provide new insights into the debates, miscalculations and actions of the Fed’s policy making council, the Federal Open Market Committee, in assessing and countering the crisis. In a running analysis of the documents, reporters for The New York Times are sharing their findings in the blog entries and tweets below.

Auto-Refresh: ON Turn ON Refresh Now Feed Twitter 11:55 A.M. Benefits of (Earlier) Hindsight

Imagine if we knew in 2011 what was said in 2008. Would it have been easier for those who were right to win the debate about doing more?

â€" Binyamin Appelbaum (@BCAppelbaum) 21 Feb 14

11:53 A.M. In April, Even Pessimism Has a Rosy Glow

Janet Yellen was known for being one of the most pessimistic members of the Fed’s policy making committee in early 2008, but even she was way off in her estimates of the magnitude of what was coming.

At the Fed’s two-day meeting in late April, she was very concerned about the future. The Fed’s internal projections, she said, represent “one of the most pessimistic economic forecasts; yet I find its recessionary projection quite plausible and see downside risks that could take the economy well below that forecast.”

At the same time, though, Ms. Yellen was not envisioning a long recession. She said that while the first half of 2008 would likely see no economic growth, in the second half she was expecting growth of 1.5 percent. That view that ended up being far too rosy, as was her assessment, at the time, that “the likelihood of a severe financial panic has diminished.”

Part of the reason for her note of optimism, was her faith in the power of government stimulus. She said that a recent fiscal stimulus package and tax rebates would likely “provide a bigger bank for the buck” than similar measures taken back in 2001.

“Of course, there is considerable uncertainty about assessing the potential size of these effects,” she said. “But over the next few months as the checks go out and the retail sales reports come in, we should get a pretty quick preliminary read on how things are shaping up.”

â€" Nathaniel Popper

11:47 A.M. More on the Lehman Decision

Jeffrey M. Lacker, then and now the Richmond Fed president, was confident that letting Lehman Brothers collapse was the right call.

“What we did with Lehman I obviously think is good,” he concluded. “It has had an effect on market participants’ assessment of the likelihood of other firms getting support, and I think you would have to attribute at least some of changes in equity prices to that.”

And while the stock market might drop in the short term, Mr. Lacker added, there was a “silver lining” to Lehman’s collapse. “I don’t want to be sanguine about it, but the silver lining to all the disruption that’s ahead of us is that it will enhance the credibility of any commitment that we make in the future to be willing to let an institution fail and to risk such disruption again.”

Thomas M. Hoenig, then the head of the Kansas City Fed, was similarly concerned that saving Lehman would have sent the wrong signal to Wall Street, the so-called moral hazard argument, which was much invoked at the time.

“I think what we did with Lehman was the right thing because we did have a market beginning to play the Treasury and us, “ Mr. Hoenig said, “and that has some pretty negative consequences as well, which we are now coming to grips with.”

â€" Nelson D. Schwartz

11:45 A.M. Was It Right to Let Lehman Fail?

Within hours of Lehman’s collapse, the debate had begun over whether the decision to let it fail had been the right one. It’s a debate that rages to this day, on Wall Street, in Washington and in academia. Eric Rosengren, head of the Boston Fed, wasn’t sure, and he astutely warned of the danger a money market fund could run into trouble as a result. That quickly happened, as the Reserve Fund ‘broke the buck’ and sent the crisis into overdrive that week.

“I think it’s too soon to know whether what we did with Lehman is right,” he said on Sept. 16. “But we took a calculated bet. If we have a run on the money market funds or if the nongovernment tri-party repo market shuts down, that bet may not look nearly so good.”

However, Mr. Rosengren stopped short of saying the decision to let Lehman collapse was the blunder that many overseas officials, like Christine Lagarde, then the French finance minister and now head of the International Monetary Fund, quickly said it was at the time.

“I think we did the right thing given the constraints that we had,” Mr. Rosengren said. “I hope we get through this week…There are a lot of lessons learned, but we shouldn’t be in a position where we’re betting the economy on one or two institutions. That is the situation we were in last weekend. We had no choice. We did what we had to do, but I hope we will find a way to not get into this position.”

â€" Nelson D. Schwartz

11:33 A.M. In January, Divergence on Recession Prospect

In January 2008, the economy had just entered what would become the worst recession since the Great Depression, by many measures.

A slew of economic data â€" on housing, industrial production, layoffs, job openings and credit-card defaults â€" had come in worse than expected, and Fed officials were attempting to gauge the possibility that a soft patch might turn into a recession.

Both Ben S. Bernanke and Janet L. Yellen were very pessimistic from the outset. “I think there are a lot of indications that we may soon be in a recession,” Mr. Bernanke said during a conference call in early January. “I think a garden-variety recession is an acceptable risk, but I am also concerned that such a downturn might morph into something more serious.”

Others were more bullish. “While there are tales of woe, none of the 30 C.E.O.’s to whom I talked, outside of housing, see the economy trending into negative territory,” said Richard Fisher of the Dallas Fed in January. “They see slower growth. Some of them see much slower growth. None of them at this juncture â€" the cover of Newsweek notwithstanding, a great contra-indicator, which by the way shows ‘the road to recession’ on the issue that is about to come out â€" see us going into recession.”

And it is in January that Fed officials first predict that the economy is outright contracting â€" an assessment that their colleagues would not fully join them in for months.

“The severe and prolonged housing downturn and financial shock have put the economy at, if not beyond, the brink of recession,” Ms. Yellen said.

Her colleague Eric Rosengren of the Boston Fed was more definitive: “We could soon be or may already be in a recession.”

â€" Annie Lowrey

11:22 A.M. Keeping the Word ‘Crisis’ in Reserve

At the March 18 meeting, Frederic Mishkin, an F.O.M.C. member, discussed the semantics of how to publicly discuss what was going on in the markets.

Mr. MISHKIN: We are in a financial crisis, and it is worse than we have experienced in any other episode of financial ‘disruption,’ which is the word I use. I will not use ‘financial crisis’ in public. ‘Financial disruption’ is still a good phrase to use in public, but I really do think that this is a financial crisis. It is surely going to be called that in the next edition of my textbook.

PARTICIPANT: When is it coming out?

Mr. MISHKIN: Wouldn’t you like to know!

â€" Peter Eavis

11:18 A.M. Geithner and Yellen Debate Bonuses

In January 2008, as the debate about Wall Street bonuses began to come to a boil, Timothy F. Geithner, the Fed president in New York, and Janet L. Yellen, the Fed president in San Francisco, found themselves on opposite sides, with Mr. Geithner defending the Wall Street status quo.

Ms. Yellen pointed to a paper by Raghuram Rajan - now the head of India’s central bank â€" about the danger of the structure of Wall Street bonuses. “I don’t know what the answer is in terms of changing these practices,” she said. “Maybe the market will attend to them, but it seems to me that we have had an awful lot of booms and busts in which this type of incentive played a role.”

Mr. Geithner, who has developed a reputation for representing Wall Street’s interest during the crisis, pushed back. “Raghu’s presentation was mostly about hedge fund compensation, and I think he is mostly wrong when you think about that and the incentive structure,” Mr. Geithner said.

He said that reforming bonuses probably wouldn’t help much: “What distinguishes how well the guys did is much more subtle around culture, independence and the quality of judgment exercised at the senior level, and this is important because, when you think about what you can do through supervision and regulation, to affect that stuff is hard.”

In the end, given the relative lack of reforms to bonuses since the crisis, it would appear that Mr. Geithner won the argument.

â€" Nathaniel Popper

11:18 A.M. ‘Already a Historic Week’

On Sept. 16, even as Fed policy makers tried to gauge the depth of the crisis, some quickly concluded that it was an economic threat of historic proportions. In a prescient comment, the head of the Boston Fed realized this wasn’t just about Wall Street any more.

“This is already a historic week, and the week has just begun,” said Eric S. Rosengren, then and now the president of the Boston Fed. “The failure of a major investment bank, the forced merger of another, the largest thrift and insurer teetering, and the failure of Freddie and Fannie are likely to have a significant impact on the real economy.

â€" Nelson D. Schwartz

11:09 A.M. Another Indicator, in a Mug

On March 18, Richard W. Fisher of the Dallas Fed cited his drinking habits in comments about inflation:

“Most distressing to me was Anheuser-Busch, since I am a beer lover. The cost of input of hops and barley has gone up 3½ percent.”

â€" Peter Eavis

11:08 A.M. ‘You Need Enough Force’

Size matters when markets are melting down. And that was evident on Sept. 16, as Fed officials debated just how much to make available abroad. William Dudley wasn’t afraid to invoke the c-word, either.

“In a crisis you need enough force â€" more force than the market thinks is necessary to solve the problem,” he said, “and we’re going to have to have discussions to determine how much is enough force.”

â€" Nelson D. Schwartz

11:06 A.M. You Can’t Spell AEIOU Without …

At the March 18 meeting, there was humor, of sorts.

Charles Plosser: “Like everyone else, I am very concerned about the developments in the
financial markets. I’ve been supportive of the steps we’ve taken to enhance liquidity in the markets
through the TAF, the TSLF, the PDCF, or whatever.”

Ben Bernanke: “AEIOU.”

Tim Geithner: “Don’t say IOU.” [Laughter]

â€" Peter Eavis

10:57 A.M. Sympathy for Banks’ Fear of Stigma

A big fear among Wall Street banks in 2008 was that they would be singled out as weak if they used the Fed emergency credit lines. William Dudley, a top Fed official, noted that the Fed had gotten questions about how it would disclose use of the Wall Street loans. He sympathized, saying, “The stigma issue is a legitimate issue, and that is why we have to be very careful about how we talk about this and take tremendous care not to disclose who or even what type of institution uses it.”

Referring to the Primary Dealer Credit Facility, one of the credit lines, he added, “But at the end of the day, if you can’t fund your repo and your only choice is to come to the P.D.C.F., that is probably what you are going to do.” Repo is a type of short-term borrowing, backed with assets like bonds.

â€" Peter Eavis

10:57 A.M. Reservations About Helping Overseas

On Sept. 16, not every Fed policy maker was so eager to rush to aid overseas central banks, especially in Europe.

Jeffrey M. Lacker, president of the Richmond Fed (then and now), wondered whether foreign institutions couldn’t use their own dollar reserves, rather than immediately benefiting from the Fed’s largess. “Broadly, I’m uncomfortable with our playing that role,” he said.

Mr. Bernanke wasn’t buying it. “Well, I don’t think there are any significant downside risks,” he said.

â€" Nelson D. Schwartz

10:51 A.M. Geithner’s Concern on Backstopping Wall Street

At the March 18 meeting, Timothy F. Geithner, president of the Federal Reserve Bank of New York, wanted the Fed to act as traditional lender of last resort, but he didn’t want to bail out all of Wall Street: “The hardest thing in this balance now is to try to do something that doesn’t increase the incentives so that we become the counterparty to everybody, ” he said. “We’re trying to make sure that it’s a backstop, but not a backstop that’s so attractive that they come, and that’s going to be a very hard line to walk.”

â€" Peter Eavis

10:47 A.M. In September, Plastic Surgery as an Indicator

Janet L. Yellen, the current Fed chairwoman, developed a reputation for forecasting the recession in 2008. On the day after Lehman Brothers filed for bankruptcy, Ms. Yellen gave a cheeky indication of the sort of evidence she was looking at in her posting at the Fed’s San Francisco regional bank. She said she was noticing “widespread” cutbacks in spending on discretionary items popular in California.

“East Bay plastic surgeons and dentists note that patients are deferring elective procedures,” she said to laughter, according to a transcript of the meeting on Sept. 16, 2008.

“Reservations are no longer necessary at many high-end restaurants. And the Silicon Valley Country Club, with a $250,000 entrance fee and seven- to eight-year waiting list, has seen the number of would-be new members shrink to a mere 13,” she said to more laughter.

â€" Nathaniel Popper

10:45 A.M. Strains Begin to Emerge Overseas

After the collapse of Lehman Brothers, worries that the crisis was spreading overseas quickly mounted. On Sept. 16, just a minute or so into the meeting, Mr. Bernanke warned other members of the committee, “there are very significant problems with dollar funding in other jurisdictions â€" in Europe and elsewhere.”

Strains were already evident in Northern Europe, as Norway moved to protect its banking system and talk of Iceland’s problems first cropped up. Iceland’s highly levered banking system would soon collapse. The Bank of England, Switzerland’s central bank, the European Central Bank, and the Bank of Japan all needed help.

The answer was to create so-called swap lines, enabling foreign banks to quickly obtain dollar funding from the Fed.

But how much, Mr. Bernanke wanted to know. The answer was a lot.

“The numbers have to be very, very large, or it should be open-ended,” said William Dudley, then a top Fed official and now president of the New York Fed. “I would suggest that open-ended is better because then you really do provide a backstop for the entire market.”

â€" Nelson D. Schwartz

10:43 A.M. Even in September, ‘Inflation’ Trumps ‘Recession’

In the fall of 2008, we now know, businesses were shedding hundreds of thousands of employees. The unemployment rate had started its march up into the double digits. The markets were stressed.

But the Fed transcripts from September make it clear how hard it can be to judge the depth of economic stress in real time. During the meeting, there were 129 mentions of “inflation.” There were just five of “recession.” Words like “soft” and “weak” pepper the transcript.

That said, Mr. Bernanke says, “I think what we saw in the recent labor reports removes any real doubt that we are in a period that will be designated as an official N.B.E.R. recession,” referring to the National Bureau of Economic Research. And by December, the Fed is predicting a “a deep, prolonged recession and a very sluggish recovery.” The economy had been contracting for three full quarters, since December 2007.

â€" Annie Lowrey

10:40 A.M. A Growing Sense of Not Doing Enough

Early in 2008, as signs of crisis were building, Janet L. Yellen scolded the other members of the open market committee to recognize that they had not done enough.

In the Jan. 21 meeting she said “the risk of a severe recession and credit crisis is unacceptably high, and it is being clearly priced now into not only domestic but also global markets.”

Meanwhile, she said, “I put the stance, as best I can judge it, of monetary policy within the neutral range.”

She said Mr. Bernanke’s proposal of a 75 basis-point cut in the Fed’s benchmark rate was a good step toward recognizing the central bank’s slowness.

“An intermeeting move will be a surprise, but I think it will show that we get it and we recognize we have been behind the curve.”

â€" Nathaniel Popper

10:31 A.M. Bear Stearns Demise as ‘Old-Fashioned Bank Run’

On March 18, two days after the Fed rescued Bear Stearns, William Dudley, the official overseeing markets at the Federal Reserve Bank of New York, told the F.O.M.C., “In my view, an old-fashioned bank run is what really led to Bear Stearns’s demise.” This utterance goes to the heart of one of the big debates of the crisis: Were many banks simply insolvent because of losses in their balance sheets, or lacking in funds, or a toxic combination of both?

â€" Peter Eavis

Two Steps Forward and One Step Back for the Federal Reserve

Simon Johnson, former chief economist of the International Monetary Fund, is the Ronald A. Kurtz professor of entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”

This week the Federal Reserve took a major step toward establishing a more sensible set of rules for global banks operating in the United States. Yet in a separate and almost simultaneous smaller announcement, the Fed announced a change to the board of the Federal Reserve Bank of New York that sent all the wrong signals regarding whether the United States will really end up with more effective oversight for its financial system.

The Fed should put its new global banking rules into effect but rethink its criteria for who should sit on the New York Fed board.

First, let me take a moment to congratulate the Fed on the good news: “Enhanced Prudential Standards for Bank Holding Companies and Foreign Banking Organizations.” This may seem arcane and it is certainly technical, but the Board of Governors of the Federal Reserve, based in Washington, has moved to close important loopholes that previously allowed foreign banks to operate in the United States in a fashion that proved dangerous.

The new rule also covers American bank holding companies; most of these rules have been in the works for a while. The more important development is to require that large foreign banks fund their American operations and manage their risks here in a more responsible manner.

In the past, some foreign banks â€" Deutsche Bank springs to mind â€" ran their American businesses with much higher debt levels relative to equity funding (they had very high “leverage,” in the jargon) than was allowed for American banks and similar financial institutions. This will no longer be allowed, according to the Fed’s release:

Foreign banking organizations with U.S. nonbranch assets of $50 billion or more will be required to establish a U.S. intermediate holding company over their U.S. subsidiaries. The foreign-owned U.S. intermediate holding company generally will be subject to the same risk-based and leverage capital standards applicable to U.S. bank holding companies. The intermediate holding companies also will be subject to the Federal Reserve’s rules requiring regular capital plans and stress tests.

If this language seems too dry, just remember the facts. In 2008, through its intervention in A.I.G. and in other ways, the Federal Reserve became a lender of last resort to large foreign banks, as well as to American financial institutions; see Pages 26 and 43 in a helpful presentation provided by Better Markets, a pro-reform group. Providing such guarantees without being able to impose effective oversight (including limits on leverage) is a recipe for moral hazard and careless behavior more generally. The Fed is now, somewhat belatedly but in a welcome fashion, recognizing these realities.

I could quibble â€" for example, with this provision: “The final rule also generally defers application of the leverage ratio to foreign-owned U.S. intermediate holding companies until 2018.” The long phase-in seems more generous than wise. But on the whole, this rule is a positive development.

Unfortunately, this good news was partly spoiled by the unrelated announcement that a vacancy on the board of the New York Fed would be filled by David M. Cote, chief executive of Honeywell. (Mr. Cote is the only candidate in an election to fill that vacancy; the vote is by what is known as Group 2 banks, which means those “with capital and surplus of $30 million to $1 billion” that belong to the Second District of the Federal Reserve System, served by the Federal Reserve Bank of New York.)

I have nothing personal against Mr. Cote, whom I have never met. But I must point out that he is not only a former board member of JPMorgan Chase, he was also on that board and a member of its risk committee from July 2007 through July 2013, a period that spanned the London Whale trading losses debacle and other egregiously unacceptable behavior that has resulted in record fines and settlements for the company (including accusations of manipulating energy markets, ignoring warning signs about Bernard Madoff’s Ponzi scheme and much more).

To be clear, not all of this happened when Mr. Cote was on the board â€" some of it goes way back â€" but it all surfaced while he was a member of the board’s risk committee, which neglected its responsibilities to investigate, correct and prevent such risks. (Mr. Cote’s experience with JPMorgan Chase is not mentioned on the New York Fed’s ballot, although it does list his other prominent public positions.)

At its shareholder meeting last year, two JPMorgan Chase directors received such low levels of support that they subsequently resigned: Mr. Cote and Ellen V. Futter, president of the American Museum of Natural History.

As reported by The New York Times, at least one influential shareholder group explicitly recommended voting against Mr. Cote and Ms. Futter because of concerns about their stewardship and ability to oversee risks. Looking at the breadth and depth of legal failures, it’s hard to deny that there was a systematic breakdown of compliance and risk control â€" and that the board failed in its responsibilities to shareholders and more broadly. (James S. Crown, who was also criticized, remains on the board and is currently chairman of the risk policy committee.)

The New York Fed is full of smart, highly professional people who work hard to make the financial system more stable. At the same time, both the New York Fed and its Board of Governors, which is responsible for all aspects of how the New York Fed operates, including who sits on its board, seem to have a tin ear with regard to governance issues and how these can threaten the Fed’s independence. (As with all other regional Federal Reserve Banks, the New York Fed board and senior staff members pick potential board members, all of which are subject to approval by the Fed’s Board of Governors in Washington.)

For example, Jamie Dimon, the chief executive of JPMorgan Chase, was on the board of the New York Fed when his company bought Bear Stearns in early 2008. Financial support for this deal was provided by the Federal Reserve System, through the New York Fed.

I have talked to people involved in this transaction, and there are various opinions regarding the extent to which the New York Fed was in control of operational details relative to merely carrying out a plan provided by the Board of Governors in Washington.

In any case, the striking fact is that Mr. Dimon subsequently remained on the board of the New York Fed despite what, in any other context, would be regarded as a related party transaction. To be clear, I have never accused Mr. Dimon of doing anything illegal or improper. But in the rest of American society â€" both in the for-profit and nonprofit sectors â€" a board member would surely resign in such a situation without any shame or embarrassment. (Mr. Dimon eventually left the New York Fed board at the end of 2012, when his term expired.)

If Mr. Dimon did not want to resign, why did the Board of Governors not ease him out? This question became even more pointed â€" including in my post in this space â€" when the New York Fed had a leading role in investigating the London Whale trading losses that became public in 2012.

And given persistent legitimate concerns regarding how the financial system is overseen â€" including the role of the New York Fed â€" why would the Board of Governors agree to install someone closely associated both with JPMorgan Chase and with one of the biggest failures of risk management in recent years?

I’m glad that the Fed’s Board of Governors is moving the regulation of foreign banking organizations in the right direction. But it also has to focus on important details, such as who sits on the board of the New York Fed.