Some six years after the 2008 financial meltdown, we are still learning important information about the mindset of policymakers during that anguished era.
Recently released transcripts of the central banks’ policy meetings in 2008 reveal that the Federal Reserve neither anticipated the Lehman Brothers bankruptcy in September 2008 nor understood its dire implications. David Stockton, the Federal Reserve’s senior forecaster at the time, said one day after Lehman’s filing on Sept. 16: “I don’t think we’ve seen a significant change in the basic outlook. We’re still expecting a very gradual pickup in GDP growth over the next year.”
Stockton was dead wrong.
Lehman’s bankruptcy filing led to a credit freeze that pushed the unemployment rate up from 5 percent to as high as 10 percent in 2009. By 2009, more than 15 million Americans were jobless.
The transcripts show that before Lehman’s collapse, the Fed did not express concerns about its financial health. They were optimistic because Lehman was benefiting from its ability to borrow from the central bank’s emergency credit lines. But instead of providing liquidity, the Fed took restrictive measures because they were worried about price run-ups in commodities.
Incredulously, although Lehman’s problems dominated newspaper headlines during the summer of 2008, transcripts of the Fed meetings in July and August reveal that Lehman’s precarious position was not mentioned.
In the immediate aftermath of Lehman’s failure, the transcripts indicate that the Fed failed to anticipate the great danger to the global economy. Bernanke said the Fed did not have enough information to cut interest rates below 2 percent.
Why did neither the Fed nor the Treasury Department take extraordinary steps to save Lehman Brothers, similar to their orchestrating JP Morgan’s acquisition of Bear Stearns in March 2008?
Bernanke and then Treasury secretary Hank Paulson did not act for several reasons: First, they wanted to avoid the criticism directed at them because the Federal Reserve agreed to reimburse JPMorgan $29 billion for potential Bear Stearns losses. Second, Bernanke and Paulson feared that bailing out Lehman would create an appetite for even more taxpayer largess.
Almost everyone applauds Bernanke’s response once he recognized the dire consequences of the global meltdown. Specifically, he set up a pipeline of liquidity to the banking system. He cut interest rates to effectively zero, bought some $2.3 trillion in government bonds and mortgage-backed securities and provided trillions of dollars’ worth of guarantees to the financial community. This required remarkable courage and ingenuity.
I believe the Fed on balance has acted responsibly. But its record has blemishes. Let me cite some examples. It:
Failed to take stringent measures to prevent the terrible combination of high unemployment and high inflation in the late 1970s and early 1980s.
Did not act in the days preceding the precipitous stock market decline of some 22 percent on Oct., 19, 1987.
Did not warn about the potential of a bubble in the late 1990s involving tech stocks, despite absurd valuation levels.
The transcripts surrounding the Lehman bankruptcy demonstrate that understanding quickly the full measure of economic turbulence remains an inexact science. We should remember that history is a social science, subject to interpretation. Analysis of the data is subject to personal prejudice.
Unlike a laboratory experiment, getting precise data on millions of transactions is impossible. We need to be skeptical of those pundits who have quick answers to complicated questions. I am reminded of what foreign secretary Zhoe En-Lai of China said in 1972 when asked about the significance of the French Revolution in 1789:
“It is too early to say.”
Originally published in the Sarasota Herald-Tribune
