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Fed was stumped by crisis, transcripts of meetings in mid-crisis reveal

| Saturday, Feb. 22, 2014, 12:01 a.m.

WASHINGTON — The Federal Reserve agonized in 2008 over how far to go to stop a financial crisis that threatened to cause a recession and at times struggled to recognize its speed and magnitude.

“We're crossing certain lines. We're doing things we haven't done before,” Chairman Ben Bernanke said as Fed officials met in an emergency session March 10 and implemented never-before-taken steps to lend to teetering Wall Street firms, among a series of 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 Fed on Friday released hundreds of pages of transcripts covering its 14 meetings 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 lag.

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 decision to let investment bank Lehman Brothers fold and the bailout of insurer American International Group.

For all its aggressive steps in 2008, the transcripts show the Fed failing at times to grasp the size of the catastrophe. 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 rate. Three weeks later, after the Fed had rescued AIG, Bernanke held an emergency conference call and won 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 transcripts show that Bernanke enjoyed the support of Janet Yellen, who succeeded him this month as Fed chair, for the unconventional policy actions he was pushing. At the time, Yellen was head of the Fed's San Francisco regional bank.

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