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
Add to Briefcase
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 »
STARTS LEGAL FUND FOR WH STAFF
Trump to Begin Covering His Own Legal Bills
1 days ago
THE DETAILS
DISCUSSED THE MATTER FOR A NEW BOOK
Steele Says Follow the Money
1 days ago
STAFF PICKS

"Christopher Steele, the former British intelligence officer who wrote the explosive dossier alleging ties between Donald Trump and Russia," says in a new book by The Guardian's Luke Harding that "Trump's land and hotel deals with Russians needed to be examined. ... Steele did not go into further detail, Harding said, but seemed to be referring to a 2008 home sale to the Russian oligarch Dmitry Rybolovlev. Richard Dearlove, who headed the UK foreign-intelligence unit MI6 between 1999 and 2004, said in April that Trump borrowed money from Russia for his business during the 2008 financial crisis."

Source:
BRITISH PUBLICIST CONNECTED TO TRUMP TOWER MEETING
Goldstone Ready to Meet with Mueller’s Team
1 days ago
THE LATEST

"The British publicist who helped set up the fateful meeting between Donald Trump Jr. and a group of Russians at Trump Tower in June 2016 is ready to meet with Special Prosecutor Robert Mueller's office, according to several people familiar with the matter. Rob Goldstone has been living in Bangkok, Thailand, but has been communicating with Mueller's office through his lawyer, said a source close to Goldstone."

Source:
SPEAKING ON RUSSIAN STATE TV
Kislyak Says Trump Campaign Contacts Too Numerous to List
1 days ago
THE LATEST

"Russian Ambassador Sergey Kislyak said on Wednesday that it would take him more than 20 minutes to name all of the Trump officials he's met with or spoken to on the phone. ... Kislyak made the remarks in a sprawling interview with Russia-1, a popular state-owned Russian television channel."

Source:
“BLOWING A SURE THING”
Sabato Moves Alabama to “Lean Democrat”
2 days ago
WHY WE CARE
×
×

Welcome to National Journal!

You are currently accessing National Journal from IP access. Please login to access this feature. If you have any questions, please contact your Dedicated Advisor.

Login