What was going on in the mind of Fed officials in 2009, the scariest time for US … – Economic Times

By Neil Irwin

The winter of 2009 was the worst, scariest time for the U.S. economy in modern memory. Employers were slashing jobs at a frenetic pace; another major bank failure seemed to lurk around every corner; and the newly installed Obama administration was having a hard time finding its footing to fight the crisis.

And at the Federal Reserve, we now know from transcripts of all that year’s monetary policy meetings, there was a great deal of hand-wringing over whether any losses on programs to increase lending would be borne by the Treasury Department or the Fed – an institution that, as it happens, passes along the money it makes to the Treasury Department, meaning that taxpayers were on the hook either way.

That is a recurring theme in 1,600 pages of transcripts released Wednesday: sweating the small stuff when the global economy was burning. Earlier installments of the transcripts showed a committee of policymakers struggling to understand the grave peril facing the domestic economy. But by 2009, virtually the entire committee had a clear understanding of the economic disaster that was underway. That clear understanding just did not always carry over to a sense of great urgency.

In fairness, the officials involved were making fast-paced decisions with incomplete information. They were caught in the fog of war, not able to take advantage of five years’ worth of hindsight. (Who among us did not say some things we wish we had not in 2009?) And a few central bank officials did display a combination of sharp economic analysis and a sense of urgency in trying to combat the downturn.

But even as the unemployment rate soared by half a percentage point each month early that year, voices urging more aggression to fight the Great Recession were often counterbalanced by fretting over all the possible downsides of their actions.

Richard Fisher, president of the Dallas Fed, warned in January 2009 about the risk of too much government stimulus, potentially aided and abetted by the Fed’s easy money.

“It strikes me that there is enormous fear in the marketplace about the potential for open-ended stimulus in fiscal policy, and there is great concern that we will acquiesce by monetizing fiscal policy,” he said.

Jeffrey Lacker, president of the Richmond Fed, was particularly worried about the possibility that the Fed’s interventions to fight a breakdown in credit markets were distorting the economy and essentially preserving institutions and forms of lending that ought to go the way of buggy whip manufacturers.

“People make choices on their way to making adjustments,” he said. “Would these leveraged borrowers like there to be a greater demand for their liabilities? Yes. This all looks as though demand is low. I will ask you a question. The buggy whip industry – is that sector broken?”

(What Lacker did not mention was that this all took place at the same time the domestic auto industry was receiving federal bailouts, and General Motors and Chrysler were at risk of becoming the 21st-century version of buggy whip makers themselves.)