US Federal Reserve records show struggle to grasp scale of 2008 crisis

Transcripts of meetings held as financial storm hit include Fed chair Ben Bernanke claiming ‘our policy is looking pretty good’

Transcripts of US Federal Reserve meetings held as the worst financial storm in living memory broke in 2008 show how members of the American central bank struggled at moments to grasp the magnitude of the crisis that was unfolding.

“I think that our policy is looking actually pretty good,” the chairman, Ben Bernanke, told colleagues two days after the collapse of Lehman Brothers, according to the documents released on Friday.

“Our quick move early this year [to cut interest rates], which was obviously very controversial and uncertain, was appropriate.”

The records of 14 scheduled and emergency policy meetings the Fed held cover only official meetings and not the countless telephone calls and unofficial gatherings of senior policy officials and financiers held during the crisis.

They give some of the clearest insight yet into how officials tackled the crisis. They also shine more light on the record and personality of Janet Yellen, then chair of the San Francisco Fed and now the first woman to lead the Fed.

As the crisis unfolded Fed officials initially were more concerned about rising inflation than unemployment. However once the scale of the event became clear, the transcripts show the Fed and Bernanke acting swiftly and decisively to contain it.

By March Bernanke had already concluded that major action had to be taken. “We live in a very special time,” the Fed chairman told colleagues in a conference call on 10 March. Bernanke went on to press for the Fed to approve his plans to act as a backstop for Wall Street.

In September, Bernanke made light of a claim in July by Henry Paulson, the then treasury secretary, that the promise of early intervention by the government would be enough to save the markets. “If you have a bazooka in your pocket and people know it, you probably won’t have to use it,” Paulson had told the Senate banking committee.

Bernanke, at the beginning of a tense meeting two months later on 16 September 16 2008 – the day after Lehman Brothers filed for bankruptcy – used the “bazooka” reference as an icebreaker in asking the other members of the Fed to allow banks to trade more freely with each other. “I prefer not to put a limit on it, so I know I’ve got my own bazooka here,” he quipped, to laughter.

Yellen’s reputation for having called the recession before her peers is borne out by the Fed’s documents. In a 21 January meeting she said: “The risk of a severe recession and credit crisis is unacceptably high, and it is being clearly priced now into not only domestic but also global markets.”

On 16 September Yellen showed her lighter side as she gave evidence of an economic slowdown in San Francisco. “East Bay plastic surgeons and dentists note that patients are deferring elective procedures,” she said to 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 13,” she said.

“Sales of cheap wine are soaring,” Yellen reported to the Fed on 8 March.

The documents also show the Fed’s attempts to avoid provoking panic. At a meeting on 18 March, Frederic Mishkin, a member of the Fed’s open market committee, said: “I will not use ‘financial crisis’ in public. ‘Financial disruption’ is still a good phrase to use in public, but I really do think that this is a financial crisis. It is surely going to be called that in the next edition of my textbook.”

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