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.

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