2008 Bernanke Was ‘Decidedly Confused and Very Muddled’ About Crisis-Era Intervention

Transcripts from the financial crisis show Fed officials in a “wait-and-see” mode after Lehman’s collapse.

Chairman of the Federal Reserve Ben Bernanke testifies before the Senate Banking Committee on July, 21, 2011.
National Journal
Catherine Hollander
Feb. 21, 2014, 11:49 a.m.

Leh­man Broth­ers, the gi­ant in­vest­ment firm, de­clared bank­ruptcy in Septem­ber 2008. The next day, the Fed­er­al Re­serve’s policy-set­ting com­mit­tee con­vened for a reg­u­larly sched­uled meet­ing as mar­kets wondered just how far Leh­man’s col­lapse would ripple through the fin­an­cial sys­tem.

Ben Bernanke, then Fed chair­man, said he was “grap­pling” with the ne­ces­sity of mak­ing ad hoc de­cisions about “mor­al haz­ard,” ac­cord­ing to tran­scripts from the 2008 meet­ings, re­leased Fri­day after a five-year lag.

“In each event, in each in­stance, even though there is this sort of un­avoid­able ad hoc char­ac­ter to it, we are try­ing to make a judg­ment about the costs — from a fisc­al per­spect­ive, from a mor­al-haz­ard per­spect­ive, and so on — of tak­ing ac­tion versus the real pos­sib­il­ity in some cases that you might have very severe con­sequences for the fin­an­cial sys­tem and, there­fore, for the eco­nomy of not tak­ing ac­tion,” Bernanke said at the Fed­er­al Open Mar­ket Com­mit­tee’s Sept. 16 meet­ing.

“I am de­cidedly con­fused and very muddled about this,” he said.

Al­though we know now that the eco­nomy was go­ing to con­tin­ue its down­ward spir­al, most FOMC mem­bers — in­clud­ing then-San Fran­cisco Fed Pres­id­ent and now-Fed Chair Janet Yel­len — thought it was too soon to provide mon­et­ary ac­com­mod­a­tion in the form of fur­ther in­terest-rate cuts at that Septem­ber meet­ing.

“My policy pref­er­ence is to main­tain the fed­er­al-funds rate tar­get at the cur­rent level and to wait for some time to as­sess the im­pact of the Leh­man bank­ruptcy fil­ing, if any, on the na­tion­al eco­nomy,” said St. Louis Fed Pres­id­ent James Bul­lard. “I think we should be seen as mak­ing well-cal­cu­lated moves with the funds rate, and the cur­rent un­cer­tainty is so large that I don’t feel as though we have enough in­form­a­tion to make such cal­cu­la­tions today,” said Charles Evans, the Chica­go Fed pres­id­ent.

Like Bul­lard and Evans, Eric Rosen­gren, pres­id­ent of the Bo­ston Fed, wasn’t a vot­ing mem­ber at that Septem­ber meet­ing. But he had a dif­fer­ent take. “This is already a his­tor­ic week, and the week has just be­gun”¦. The de­gree of fin­an­cial dis­tress has ris­en markedly,” Rosen­gren said. “Giv­en that many bor­row­ers will face high­er in­terest rates as a res­ult of fin­an­cial prob­lems, we can help off­set this ad­di­tion­al drag by re­du­cing the fed­er­al-funds rate.”

The FOMC’s vot­ing mem­bers un­an­im­ously stood pat at that Septem­ber meet­ing’s con­clu­sion, leav­ing the fed­er­al-funds rate at 2 per­cent. As the eco­nomy con­tin­ued to un­ravel over the com­ing months, the Fed op­ted to act, cut­ting the rate to near zero when it met in Decem­ber and ush­er­ing in a new era of mon­et­ary policy as the Fed turned to un­con­ven­tion­al tools — like the three bond-buy­ing pro­grams it has since launched — to boost the eco­nomy.

What We're Following See More »
‘PRESUMPTIVE NOMINEE’
Priebus Asks Party to Unite Behind Trump
11 hours ago
THE LATEST
FEELING THE MIDWESTERN BERN
Sanders Upsets Clinton in Indiana
12 hours ago
THE LATEST

Despite trailing Hillary Clinton by a significant margin, Bernie Sanders wasn't going the way of Ted Cruz tonight. The Vermont senator upset Clinton in Indiana, with MSNBC calling the race at 9pm. Sanders appears poised to win by a five- or six-point spread.

Source:
TRUMP IS PRESUMPTIVE NOMINEE
Ted Cruz Bows Out, Effectively Ceding the Contest to Trump
13 hours ago
THE LATEST

And just like that, it's over. Ted Cruz will suspend his presidential campaign after losing badly to Donald Trump in Indiana tonight. "While Cruz had always hedged when asked whether he would quit if he lost Indiana; his campaign had laid a huge bet on the state." John Kasich's campaign has pledged to carry on. “From the beginning, I’ve said that I would continue on as long as there was a viable path to victory,” said Cruz. “Tonight, I’m sorry to say it appears that path has been foreclosed."

Source:
TAKES AT LEAST 45 DELEGATES
Trump Wins Indiana, All but Seals the Nomination
13 hours ago
THE LATEST

The Republican establishment's last remaining hope—a contested convention this summer—may have just ended in Indiana, as Donald Trump won a decisive victory over Ted Cruz. Nothing Cruz seemed to have in his corner seemed to help—not a presumptive VP pick in Carly Fiorina, not a midwestern state where he's done well in the past, and not the state's legions of conservatives. Though Trump "won't secure the 1,237 delegates he needs to formally claim the nomination until June, his Indiana triumph makes it almost impossible to stop him. Following his decisive wins in New York and other East Coast states, the Indiana victory could put Trump within 200 delegates of the magic number he needs to clinch the nomination." Cruz, meanwhile, "now faces the agonizing choice of whether to remain in the race, with his attempt to force the party into a contested convention in tatters, or to bow out and cede the party nomination to his political nemesis." The Associated Press, which called the race at 7pm, predicts Trump will win at least 45 delegates.

Source:
THE QUESTION
What’s the Average Household Income of a Trump Voter?
18 hours ago
THE ANSWER

Seventy-two thousand dollars, according to FiveThirtyEight. That's higher than the national average, as well as the average Clinton or Sanders voter, but lower than the average Kasich voter.

Source:
×