Federal Reserve initially failed to grasp 2008 crisis

The transcripts of the meetings show the Fed’s struggles to cope with the financial crisis under Mr Bernanke

During the 2008 financial crisis, the US Federal Reserve struggled to grasp the scope of the problem and how to adequately respond, transcripts reveal.

After a five-year wait, the central bank released the records of a total of 14 meetings from 2008.

The transcripts offer the clearest insights yet into the central bank’s thinking during the crisis.

“Frankly, I am decidedly confused and very muddled” said former chair Ben Bernanke during a September meeting.

Overall, the documents paint a picture of the Fed that shows that it worried perhaps more than it should about inflation risks, and failed to grasp initially the full impact of the housing market crisis.

However, once the extent of the problems were known, the central bank was largely in agreement about moving decisively to prevent the next Great Depression from occurring.

‘I am very concerned’

The hundreds of pages of transcripts underscore the difficulty of coping with the financial crisis and the Fed’s scramble to react to events like the collapse of Bear Sterns in March of 2008.

Minutes from the 16 September 2008 meeting – which took place a day after the Fed had allowed Lehman Brothers to fail – show that Mr Bernanke and other Fed officials were grappling with the implications of bailing out some institutions and not others.

Mr Bernanke worried about the “ad hoc” nature of deciding who to bail out, while noting “the real possibility in some cases that you might have very severe consequences for the financial system and, therefore, for the economy of not taking action.”

However, overall the September transcripts indicate that most members of the Fed thought the crisis was contained.

At another point, Mr Bernanke said: “I think that our policy is looking actually pretty good,” indicating he thought that a move by the central bank earlier in 2008 to trim interest rates had stemmed the tide of the crisis.

After that meeting concluded with the bank keeping its benchmark interest rate at 2%, just two days later, Mr Bernanke and Treasury Secretary Henry Paulson were forced to speak to members of Congress, advising them to agree to a bailout of the banking system.

‘A witch’s brew’The transcripts also give an insight into current Fed chair Janet Yellen’s involvement with its decisions during the crisis.

Although Ms Yellen went along with the decision to keep rates steady in September, she warned during the same meeting: “I am very concerned about downside risks to the real economy and think that inflation risk is diminished.”

At an October meeting, Ms Yellen noted the dire events that had occurred that year, saying the Fed had received “witch’s brew of news”.

“The downward trajectory of economic data,” Yellen went on, “has been hair-raising”.

“It is becoming abundantly clear that we are in the midst of a serious global meltdown,” she said.

You Can’t Beat Climate Change With Weather Guns

John Kerry gave a speech in Jakarta, Indonesia, last weekend where he referred to climate change as “perhaps the world’s most fearsome weapon of mass destruction.” Defense Secretary Chuck Hagel and Navy Admiral Samuel Locklear, the head of U.S. Pacific Command, have made similar statements. Yet the most recent research shows that the human output of carbon dioxide, a leading cause of climate change, is only getting worse, increasing the probability that mean global temperatures will rise by the end of this century, perhaps by as much as 4.5 degrees Celsius, which would be disastrous.

Some researchers have proposed changing the weather deliberately, a strategy referred to as geoengineering. It’s sometimes considered the last-ditch effort to avert the worst possible effects of climate change and it’s controversial to say the least.

One weather-shifting tactic that’s received a lot of attention from researchers involves enormous injections of sulfate into the atmosphere via boats or even balloons. The sulfate works like a volcanic ash cloud bouncing more of the sun’s light back into space and resulting in cooler global temperatures. The idea works, in theory, but a team of researchers from the University of Washington this week found that, if not properly maintained, any attempt to change the weather by continually pushing sulfate into the atmosphere will backfire.

They describe their findings in this paper:

Here’s the key point: “If such an enhanced stratospheric aerosol layer were produced, any interruption to its continual maintenance would cause a quick return to natural aerosol levels within 1–2 years…In turn, global temperature would increase rapidly as the climate adjusts to the full, unmasked GHG radiative forcing.”

If the U.S. or some other government were to begin a program of solar radiation management with sulfate, and continue the program for decades, it would need to keep up the program, perhaps indefinitely. Without consistent injections, warming could get much worse very quickly, bringing about the dreaded  4°C rise in as little as a decade.

In other words, our climate could get hooked on sulfate.

The University of Washington researchers aren’t the first team to point out the potential dangers of geoengineering. But they are the first to find that the extreme variability in weather patterns that would result from abruptly ceasing sulfate blasts would be higher than researchers had previously anticipated.

The GAO has recommended continued research into geoengineering before any anyone makes an attempt to purposely tamper with the climate. And the researchers say if solar radiation management is tied to aggressive and sustained efforts to actually curb greenhouse gases, the results will be better.

In short, global warming may be the newest security threat, but that doesn’t mean we’ll defeat it by shooting at it.

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• 19:00 20 February 2014 by Colin Barras