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