Board members at the Federal Reserve have come a long way in the past six years. Last week, the US central bank released transcripts of its major scheduled and unscheduled meetings in 2008, as it tussled with the worsening financial crisis. These reveal a lot of honest debate but ultimately then-Chairman Ben Bernanke and his team acted too late. That experience, and enhanced powers, should give them more insight earlier. But that can only take them so far.
The reports from the 14 scheduled and emergency board meetings that year are a must-read. This 12-month slice of history charts how the governors moved from grappling with conflicting reports on inflation and economic growth in January to unleashing as many helicopters and bazookas as possible to prevent a meltdown by the end of the year.
Consider, though, how different events might have been if some of the post-crisis powers were available back then. The Fed now has oversight over all major financial institutions, and runs them through rigorous annual stress tests. Had this been in effect prior to the crisis, Bernanke and his fellow governors would have been far better informed about the parlous state of banking and Wall Street and less reliant on market reports.
As it was, at its emergency meeting on January 9, Bernanke admitted "it's hard to say now much contingent additional exposure" banks had and could only make vague references to fears that capital constraints might make banks lend less.
They would also have had more information to hand in general. Disclosure is far more rigorous now for both derivatives and mortgage loans, for example. And, new agencies like the Financial Stability Oversight Council and the Consumer Financial Protection Bureau are, in theory at least, keeping a more watchful eye over financial developments.
The Fed was, though, hardly starved of information. By the end of 2007 the markets had already been hit by severe liquidity concerns and banks' toxic assets were piling up. Yet, in early 2008 the Fed was worried about being too aggressive and sending the wrong signals. At the start of crisis, data can only go so far in overcoming doubt and indecision.
