Hindsight, according to the old cliche, is 20/20. Sometimes I wish that were so.
Last week we were offered a little trip down Memory Lane, compliments of the U.S. Federal Reserve, which last week released thousands of pages of transcripts from meetings that took place on and around the 2008 bailouts of Bear Stearns and AIG, and the “non-bailout” of Lehman Brothers. While many of the comments, especially those that severely underestimated the crisis in the early days, were fun to read, it does not appear we have achieved clarity of vision these last five years.
Sure, the passage of time allowed some of the Fed’s internal questions to be answered. For example, yes, a recession was on the way and it would be a bad one. (According to this NY Times article, it took them nearly a year to figure that out). Even after initial rate cuts were imposed, the consensus was that, post-Bear Stearns, the worst of the crisis had passed and rates would soon be moving higher. Even Janet Yellen, who generally advocated swift and aggressive policy maneuvers, was uncharacteristically upbeat by June of 2008.
“Our next move on the funds rate is likely to be up, and the question is when. I would envision beginning to remove policy accommodation toward the end of this year,” she said at the June 25, 2008 meeting.
As we all now know, the next moves were down, down and down, all the way to the zero bound, where it sits today, five years after the fact.
What have we learned, other than the experts to whom we entrust the keys to the kingdom are no more prescient than others during times of market stress? What should have been done with Lehman? Would a firmer backstop after the Bear bailout have prevented Lehman and AIG? And what about moral hazard?
Alas, there are no easy answers to these difficult questions. What remains clear, though, is that financial firms – those that retained solvency – have fared quite well, as have the folks running them. In other words, there have been few disincentives to the marketplace in avoiding future crises. The best the regulators can do, it seems, is assure the public that the new regulatory regime will prevent a repeat occurrence. If only their collective foresight were sufficiently accurate.
One final “Aha!” moment I got from the transcripts is from Tim Geithner, who at the time was running the New York Fed:
“There is nothing more dangerous in what we’re facing now, than for people who are knowledgeable about this stuff to feed these broad concerns about our credibility and about the basic core strength of the financial system.”
In other words, the overriding concern is maintaining confidence in the system, and anything less than a united front is dangerous, so all must check their viewpoints at the door and follow the established plan.
I can see clearly now.
To view the 2008 transcripts, click here.