The U.S. Federal Reserve on Friday unveiled some of its internal conversations from the darkest days of the financial crisis, releasing to the public transcripts of policy-setting meetings for the year 2008. The records show that the U.S. central bank, under the guidance of then-Chairman Ben Bernanke, was caught off guard by the severity of the crisis, but quickly took a series of unprecedented steps to reinforce the crumbling financial system and limit damage to the U.S. and world economies.
"We're crossing certain lines. We're doing things we haven't done before," Bernanke said as Fed officials met in an emergency session on March 10, 2008 and launched never-before-taken steps to lend to teetering Wall Street firms, among a series of other unorthodox moves that year to calm investors and aid the economy.
"On the other hand, this financial crisis is now in its eighth month, and the economic outlook has worsened quite significantly."
The transcripts cover the 14 meetings the Fed held during 2008 – eight regularly scheduled meetings and six emergency sessions. The Fed releases full transcripts of each year's policy meetings after a five-year period.
The 2008 transcripts cover the most tumultuous period of the crisis, including the collapse and rescue of investment bank Bear Stearns, the government takeover of mortgage giants Fannie Mae and Freddie Mac, the fateful decision to let investment bank Lehman Brothers collapse in the largest bankruptcy in U.S. history, and the bailout of insurer American International Group (AIG).
The Fed's moves failed to prevent colossal damage from the crisis. The U.S. economy sank into the worst recession since the 1930s. But Fed officials and many economists have argued that without the Fed's aggressive actions, the Great Recession would have been more catastrophic, perhaps rivaling the Great Depression.
Still, for all its aggressive steps in 2008, the transcripts show the Fed failing at times to recognize the severity of the situation. Bernanke and his top lieutenants often expressed puzzlement that they weren't managing to calm panicky investors.
As late as Sept. 16, a day after Lehman Brothers filed for bankruptcy, Bernanke declared, "I think that our policy is looking actually pretty good."
The Fed declined at that meeting to cut its benchmark short-term interest rate. Yet just three weeks later, after the Fed had rescued AIG, Bernanke felt compelled to call an emergency teleconference, during which he secured approval for a half-point rate cut.
Early in the year, some Fed officials had yet to appreciate the gravity of the crisis. In January, Frederic Mishkin, a Fed governor, missed an emergency conference call because he was "on the slopes."
"I think in Idaho somewhere," Bernanke said.
The crisis had been building for months. In the Jan. 21 conference call, Bernanke rallied support for a deep cut in interest rates. He warned that market turmoil reflected investors' concerns that "the United States is in for a deep and protracted recession."
Bernanke apologized to his colleagues for convening that call on the Martin Luther King holiday. But he felt the urgency of the crisis required the Fed to act before its regularly scheduled meeting the next week. It approved a cut of three-fourths of a percentage point in its benchmark for short-term rates.
The transcripts also reveal the arguments Bernanke deployed to marshal backing for unconventional policy actions – including support from Janet Yellen, who succeeded Bernanke this month as Fed chair. At the time, Yellen was head of the Fed's San Francisco regional bank.
At an Oct. 28-29 Fed meeting, Yellen noted the dire events that had occurred that fall. With a nod to Halloween, she said the Fed had received a "witch's brew of news."
"The downward trajectory of economic data," Yellen went on, "has been hair-raising – with employment, consumer sentiment, spending and orders for capital goods, and homebuilding all contracting."
Market conditions had "taken a ghastly turn for the worse," she said. "It is becoming abundantly clear that we are in the midst of a serious global meltdown."
Yellen had downgraded her economic outlook and was predicting a recession, with four straight quarters of declining growth. The recession was later determined to have begun in December 2007. It lasted until June 2009.