On the latest episode of NetNet TV, CNBC's
Jeff Cox and Patti Domm respond to the Fed crisis.
Even for an entity
used to doing heavy lifting when it comes to supporting the U.S. economy, 2008
was a historic year for the Federal Reserve.
The central bank was
left to grapple with the worst downturn since the Great Depression and was
challenged to come up with innovative tools to get the economy back on its
feet.
Transcripts from that
year's meeting, released in a massive document dump Friday, show the depths of
Fed deliberations as a crisis on Wall Street threatened to tear the global
economy apart.
As policy makers
rushed in to save Bear Stearns and AIG but not Lehman Brothers, then-Chairman
Ben Bernanke considered the ramifications.
"There have been
criticisms from the right and from the left," Bernanke said at the Oct.
28-29 meeting. "From the right, the initial criticism was that we have no
business interfering with the market process. We should let them fail. The
market will take care of it."
(Read more: Some Fed members
raised idea of rate hikes)
"I never took
this seriously," he added. "I just don't believe that you can allow
systemically critical institutions to fail in the middle of financial crises
and expect it to be not a problem."
The September
emergency meeting, which came the day after Lehman Brothers filed for
bankruptcy on the 15th, showed officials grappling with the full scope of the
problem and trying to anticipate the landscape ahead. They often appeared to be
groping in the dark in trying to devise solutions to the chaos.
"Personally, I
see the prospects for economic growth in the foreseeable future as quite weak,
notwithstanding the second quarter's strength," then-Chairman Ben Bernanke
said. "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 (National
Bureau of Economic Research) recession."
Current Chair Janet
Yellen saw things much the same way as she ruminated over the problems in
housing and employment.
Keith Lew | Flickr
Vision | Getty Images
September 15, 2008, the day the 150 year old Lehman Brothers
declared bankruptcy.
"The interaction
of higher unemployment with the housing and financial markets raises the
potential for even worse news—namely, an intensification of the adverse
feedback loop we have long worried about and are now experiencing," she
said from her position then as leader of the San Francisco Fed. "Indeed,
delinquencies have risen substantially across the spectrum of consumer loans,
and credit availability continues to decline."
Interestingly, Yellen
advocated for no change in the funds rate, which was at 2 percent then. The
Open Market Committee followed that meeting with successive cuts of 50 basis
points at two October meetings and another 75 basis points in December.
(Read more: This jobs report
should keep Yellen up at night)
During the
otherwise-intense discussions at the September meeting, Yellen found a way to
interject some levity—thought it was unclear if it was intentional—as she
described economic conditions in her district. The transcript read:
"My contacts
report that cutbacks in spending are widespread, especially for discretionary
items. For example, East Bay plastic surgeons and dentists note that patients
are deferring elective procedures. [Laughter] 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 thirteen. [Laughter]
Yellen worried
throughout the year about the economy and was an advocate both for aggressive
asset purchases as well as knocking interest rates down to the zero-bound
level, where they remain.
""It appears
that the economy has stalled and may have fallen into a recession," Yellen
said in April.
She noted tight credit
markets as a major source of worry.
"Credit
conditions have turned quite restrictive," Yellen said. "This credit
crunch reflects the drying up of financing both for markets that were important
sources of business and consumer credit and from banks that are contending with
capital-depleting losses and illiquid assets."
(Read more: Markets flooded
with cash, but what about risks?)
The year began with a
drop in the red-hot housing market and the crumbling of the subprime mortgage
industry that helped blow up the real estate bubble.
Yet there was
hope—ultimately misplaced—at the Jan. 29-30 meeting that a recession would be
avoided altogether.
"We are not
forecasting a recession," board member Dave Reifschneider said.
"While the model estimates of the probability of recession have moved up,
they are not uniform in their assessment that a recession is at hand."
By the time the year
was over, the Great Recession left some of the Street's most venerable names in
the dust: Lehman Brothers, Bear Stearns, Merrill Lynch, Washington Mutual and a
host of other financial powerhouses.
Fed transcripts from
2008 crisis meeting
CNBC's Steve Liesman provides insight on the
Federal Reserve's release of the discussions at the 2008 crisis meeting.
In October, weeks
after the Lehman collapse, it became clear how bad things had gotten.
"It's more than
obvious that we have an extraordinary situation," Bernanke said. "It
is not a single market. It's not like the 1987 stock market crash or the 1970
commercial paper crisis. Virtually all the markets, particularly the credit markets,
are not functioning or are in extreme stress. It's really an extraordinary
situation, and I think everyone can agree that it's creating enormous risks for
the global economy."
The Fed began cutting
interest rates aggressively in January, with two cuts amounting to 1.25
percentage points, and by year's end had taken the policy rate down to nearly
zero. It also began a bond-buying program that ultimately would take the
central bank balance sheet past the $4 trillion mark.
In the transcripts
there are detailed descriptions of the deliberations that helped the Open
Market Committee make history.
Fed members clearly
were torn over how to respond to the crisis.
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