Transcripts show Fed's fear of big bank aid

WASHINGTON — As the Great Recession inflicted worsening damage on the economy, the Federal Reserve struggled during 2009 to determine the best corrective steps to pursue.

Transcripts of their meetings released Wednesday showed that the Fed's policymakers feared the precedents being set by providing billions of dollars of government aid to the nation's largest banks. They also debated ways to provide support to an economy that was losing hundreds of thousands of jobs a month.

Janet Yellen, at the time head of the Federal Reserve Bank of San Francisco and now the Fed chair, was particularly spot-on in her predictions. Yellen envisioned an especially weak recovery and insisted that the world's biggest economy needed significant help.

During an emergency call on the morning of Jan. 16, 2009, after the government had announced a $20 billion bailout for Bank of America, Chairman Ben Bernanke declared that he was unwilling to allow “the failure of a firm the size of Bank of America.”

The call underscored the chaos facing the Fed and other government agencies as they confronted a financial crisis that had ignited in September with the takeover of mortgage giants Fannie Mae and Freddie Mac and the collapse of Lehman Brothers in the largest bankruptcy in U.S. history. The Bush administration scrambled to assemble a $700 billion bailout fund that Congress approved to try to stabilize the financial system.

Bernanke apologized to the group for not informing them about the details of the Bank of America rescue before it was publicly announced. He said officials had moved up the announcement at the request of the bank, which was worried about deteriorating market conditions.

The economic downturn was hitting with destructive force in early 2009. The economy contracted sharply, with job losses averaging 774,000 in the first three months of the year and stock prices plunging.

Faced with the turmoil in financial markets and rapidly rising unemployment, Fed policymakers at their March 17-18 meeting decided to expand by $1.2 trillion a bond purchase program it had begun in November. The goal of the unprecedented effort was to push long-term interest rates lower to boost the economy at a time when the Fed's main policy lever, short-term interest rates, had already been cut as low as they could go near zero.

Over the next five years, the Fed's purchases of Treasury and mortgage bonds would expand its balance sheet to $4.5 trillion, a nearly five-fold increase from where the balance sheet had stood before the financial crisis hit in the fall of 2008. The Fed did not end the bond purchases until last October.

At the March 2009 meeting, the transcripts showed policymakers were worried that the bond buying program would not be big or bold enough to restore confidence.

“The only thing worse than buying Treasurys is to buy them in such a tepid way that we don't have any effect,” said Fed Governor Kevin Warsh. “I think if we're in, we're in. We're crossing the Rubicon.”