AUDIE CORNISH, HOST:
The Federal Reserve today released transcripts of its meetings in 2008, back when the financial crisis was unfolding. The documents show Fed policymakers struggling to understand and respond to failing Wall Street banks and a global financial system in turmoil. NPR's John Ydstie has been reading through the transcripts and joins us now. Hey there, John.
JOHN YDSTIE, BYLINE: Hi, Audie.
CORNISH: So we've had these minutes, at least - right? - from most of these meetings, for years. What do we learn from the transcripts?
YDSTIE: Well, what we get is the actual dialogue and debate, the back and forth between Fed Chairman Bernanke and the other policymakers. So, you know, we get a much more human picture of what was going on.
CORNISH: So what was the tone, I mean, given what these policymakers were facing? Were they frantic, calm, somewhere in the middle?
YDSTIE: Well, you know, you'd expect some pretty dramatic moments. But the rhetoric is really quite restrained, not hair-on-fire kind of stuff. Mostly what you get is policymakers struggling to understand the full scope of the threat, and what to do about it. Now, as early as the Jan. 9th meeting, Chairman Bernanke does talk about the threat of something more than a garden-variety recession. But for much of the year, policymakers don't seem as aware as they should be about what they're facing. Now, of course, we get to criticize them with the help of 20/20 hindsight.
CORNISH: Now there are a mountain of transcripts, but you've got a few of them - right? - from a dozen different meetings. Is there one that really stands out?
YDSTIE: Well, that would be the Sept. 16th meeting, which occurred just a couple days after the Wall Street bank Lehman Bros. failed. And remember, neither the Fed nor the Treasury stepped in to rescue Lehman. Bernanke had concluded that the Fed didn't have the authority to do it. So at that September meeting, board members were discussing the implications of the failure.
Tom Hoenig, the - then the Kansas City Fed chairman, says: I think what we did with Lehman was the right thing because the market was beginning to play the Treasury and the Fed. But Eric Rosengren, president of the Boston Fed, says: I think it's too early to know. We took a calculated bet. If we have a run on money market funds, that may not look nearly so good. And a couple days later, there was a run on money market funds, and the economy began to really tank. So now, a lot of people think that allowing Lehman to go down was the biggest mistake that the Fed made.
CORNISH: Do you get the feeling from this transcript that there was a real sense of urgency in that meeting?
YDSTIE: Well, you know, it's kind of a mixture. There's actually a bit of joking around, maybe to break the tension in the room. It is clear that the policymakers know there's a huge crisis in the financial markets. After all, Tim Geithner, who was then president of the New York Fed, isn't at the meeting because he's in New York, finalizing the government takeover of AIG, the giant insurance firm. But it's also clear they're still trying to understand the full dangers to the broader economy.
Janet Yellen, the current Fed chair who was then president of the San Francisco Fed, says she is decidedly more pessimistic about the economic outlook. And then she points out that discretionary spending is softening. For example, she says, East Bay plastic surgeons and dentists note that patients are deferring elective procedures. Of course, it got a lot worse than that.
CORNISH: Now, where does Chairman Bernanke come down in that discussion of economic implications and what to do?
YDSTIE: Well, at that September meeting, Bernanke says: I think our policy is looking pretty good. They'd already cut interest rates earlier in the year, so the Fed officials decide to leave their benchmark interest rate at 2 percent. Now just three months later, in December, Bernanke's tone is much more sober. He says: We are at a historic juncture, both the U.S. economy and the Federal Reserve. It's not a moderate recession, and it's not a normal financial downturn.
At that meeting, the Fed cuts its rate to essentially, zero.
CORNISH: NPR's economics correspondent John Ydstie. John, thank you.
YDSTIE: You're welcome, Audie.
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