Wonkbook: Inside the crisis-era Fed

February 24

Welcome to Wonkbook, Wonkblog’s morning policy news primer by Evan Soltas. To subscribe by e-mail, click here. Send comments, criticism, or ideas to Wonkbook at Washpost dot com. To read more by the Wonkblog team, click here.


(Photo by Chip Somodevilla/Getty Images)

Wonkbook's Number of the Day: 1.9 percent. That's the size of the Obama administration's proposed cut in Medicare payments in 2015.

Wonkbook's Graph of the Day: Honey, I shrunk the U.S. Army

Wonkbook's Top 5 Stories: (1) how the Fed handled 2008; (2) why it's hard to cut health spending; (3) Hagel's 'Army of one' plan; (4) climate change's fiscal fires; and (5) why we need the Frye standard.

1. Top story: Inside the crisis-era Fed

Fed misread crisis in 2008, records show. "On the morning after Lehman Brothers filed for bankruptcy in 2008, most Federal Reserve officials still believed that the American economy would keep growing despite the metastasizing financial crisis. The Fed’s policy-making committee voted unanimously against bolstering the economy by cutting interest rates, and several officials praised what they described as the decision to let Lehman fail, saying it would help to restore a sense of accountability on Wall Street...The hundreds of pages of transcripts, based on recordings made at the time, reveal the ignorance of Fed officials about economic conditions during the climactic months of the financial crisis. Officials repeatedly fretted about overstimulating the economy, only to realize time and again that they needed to redouble efforts to contain the crisis. The Fed’s chairman at the time, Ben S. Bernanke, was unusually clearsighted in warning of the risk of a severe recession as the nation entered into a presidential election year. But he struggled to persuade his colleagues, and at crucial junctures he did not push forcefully for stronger action." Binyamin Appelbaum in The New York Times.

Primary source: Read the 2008 Fed transcripts for yourself here.

Check this out: The New York Times has a cool interactive tool for the Fed transcripts.

Yellen to testify before Senate panel next week. "Federal Reserve Board Chairwoman Janet Yellen will testify in the Senate next week on the Fed's monetary policy course and the state of the economy. The Senate Banking, Housing and Urban Affairs Committee’s semiannual hearing on the monetary policy report was delayed two weeks ago because of a snowstorm that hit the northeast." Ramsey Cox in The Hill.

As crisis loomed, Yellen made wry and forceful calls for action. "What the transcripts show is a woman who was constantly pushing her peers — and also cleverly cajoling them — to do more to help ordinary households, not just financial institutions. At the same time, she urged her colleagues to look at the flaws in the banks that caused the crisis in the first place. “I don’t believe in gradualism in circumstances like these,” Ms. Yellen said in March 2008, months before the situation came to a boil. In the end, during the most terrifying moments, Ms. Yellen helped persuade even the staunchest opponents of more aggressive actions to go along with the policies that the head of the Fed, Ben S. Bernanke, wanted." Nathaniel Popper in The New York Times.

@JohnJHarwood: New Fed minutes offer pretty good reasons to feel reassured that Janet Yellen is sitting in the big chair

Fed's aid in crisis stretched worldwide. "In conversations with counterparts at the European Central Bank, Mr. Dudley said, he learned that there was “quite a bit of interest” in “an open facility where European banks could come and get dollars.” So began what would become the biggest United States government bailout that most people do not know anything about. The new transcripts, released Friday after a customary five-year delay, shed light on one of the most significant but least understood parts of the Fed’s expansive rescue efforts in the crisis. While reporters and lawmakers focused on the bailouts of American financial institutions, the Fed was quietly pumping hundreds of billions of dollars to nations stretching from Switzerland to South Korea to bolster global banks when dollars were in short supply. European banks were particularly heavy beneficiaries. At their peak in December 2008, these “liquidity swap lines” totaled $580 billion." Neil Irwin in The New York Times.

How the Fed saw a recession, then did, and then didn't. "Federal Reserve officials went back and forth on whether the economy was in a recession in 2008. In winter, they thought it likely. In spring, they were certain. In summer, they changed their minds. And in the fall, they realized not only was the economy contracting, it was in the midst of a crisis of historical proportions." Annie Lowrey in The New York Times.

@JustinWolfers: Bottom line from the 2008 Fed transcripts: MVP: Janet Yellen. Best team player: Ben Bernanke. Sin Bin: Richard Fisher

In a dark year, a lighter side at the Fed. "Timothy F. Geithner, then the president of the New York Fed, gets a laugh for describing a discussion as being “like pro wrestling.” Ben S. Bernanke, then the chairman, admits that he can play “Jekyll and Hyde quite a bit and argue with myself in the shower and other places.” After a report shows the economy growing at a 2 percent annual pace, he also gets a laugh for quipping that Republicans should run on the slogan, “The Economy: It Could Be Worse.”" Annie Lowrey in The New York Times.

Explainer: Why low inflation can be an economic diseaseTim Harford in The Financial Times.

Fannie Mae payments to U.S. to exceed bailout. "On Friday, Fannie Mae passed a milestone years in the making. The District-based mortgage giant announced that by next month it will have sent the Treasury more than it received from a taxpayer-funded bailout. Fannie reported that it will pay the government $7.2 billion in March. With that payment, the company will have sent $121 billion in dividends to the government — compared with the $116 billion it requested from the Treasury." Dina ElBoghdady in The Washington Post.

Housing sales fall to 18-month low as a result of low inventories. "Sales of previously owned homes fell by 5.1% to a seasonally adjusted annual rate of 4.62 million, the National Association of Realtors said Friday. The median sales price in January stood at $188,900, up 10.7% from a year earlier. Friday's report shows how the housing market is struggling to shift gears, from a marketplace propelled by investors chasing foreclosed properties to one where first-time and trade-up buyers play a larger role now that the supply of distressed properties has dropped sharply...But real-estate agents say the market also is being constrained by a lack of supply. There were only 1.9 million homes on the market in January, according to the Realtors' group. While that was a 2.2% increase from December, only three months during the past 12 years have seen inventories at even lower levels." Conor Dougherty and Nick Timiraos in The Wall Street Journal.

@ObsoleteDogma: In conclusion: There are Fed members who have been wrong about everything the past 7 years, and they continue to be wrong.

How the G20 wants to spur global growth. "Under the G-20 plan, advanced economies would continue with their easy-money policies while emerging markets would seek to restructure their economies and tame inflation. In addition, governments everywhere would be expected to channel private-sector finance into new infrastructure projects. The IMF, which expects growth of 3.7% this year and 3.9% in 2015, says its plan would add half a percentage point to global growth annually over the coming four years." Ian Talley and James Glynn in The Wall Street Journal.

Music recommendations interlude: Pet Shop Boys, "Love Is a Bourgeois Construct," 2013.

Top opinion

CLARK: Your ancestors, your fate. "[M]y colleagues and I estimate that 50 to 60 percent of variation in overall status is determined by your lineage. The fortunes of high-status families inexorably fall, and those of low-status families rise, toward the average — what social scientists call “regression to the mean” — but the process can take 10 to 15 generations (300 to 450 years), much longer than most social scientists have estimated in the past. We came to these conclusions after examining reams of data on surnames, a surprisingly strong indicator of social status, in eight countries — Chile, China, England, India, Japan, South Korea, Sweden and the United States — going back centuries. Across all of them, rare or distinctive surnames associated with elite families many generations ago are still disproportionately represented among today’s elites." Gregory Clark in The New York Times.

VINIK: What our economy needs if we are to raise the minimum wage. "On Tuesday, the Congressional Budget Office delivered a mixed verdict on Democrats' proposal to increase the federal minimum wage to $10.10: The hike would raise wages for 16 million people, lift 900,000 people out of poverty, and kill 500,000 jobs. But what if there were a way to improve Americans' incomes without any job loss? In fact, there is. It’s called full employment. And if the CBO is right that hundreds of thousands of Americans would lose their jobs due to a minimum-wage hike, then getting the economy back to full employment is even more important." Danny Vinik in The New Republic.

FRANK: Winners take all, but can't we still dream? "One group, for example, says the ability to widely distribute the best performers’ products at low cost portends a world where even small differences in talent command huge differences in reward. That view is known as the “winner take all” theory. In contrast, the “long tail” theory holds that the information revolution is letting sellers prosper even when their offerings appeal to only a small fraction of the market. This view foresees a golden age in which small-scale creative talent flourishes as never before." Robert H. Frank in The New York Times.

DAYEN: How to get millenials out of their parents' basements and into the economy. "All this has led to what we can call the Great Delay. The normal milestones of adulthood—moving out of the childhood home, buying a car, getting a mortgage—are coming later and later in life. Could the way we finance higher education in America be sucking the vitality out of the economy, digging an entire generation a hole from which they cannot escape?" David Dayen in The New Republic.

DIONNE: Obama needs to do more, not less, on his own. "Take the matter of executive orders. According to the American Presidency Project at the University of California at Santa Barbara, Obama issued 147 executive orders in his first term. This compares with 173 in George W. Bush’s first term, 200 in Bill Clinton’s, 213 in Ronald Reagan’s and 320 in Jimmy Carter’s single term in office. By this standard, Obama is not doing a very good job if he wants to be a tyrant." E. J. Dionne in The Washington Post.

Got to be kidding me interlude: Half the South believes the Civil War was about states' rights.

2. Why it's hard to cut health spending

U.S. proposes cuts to rates in Medicare payments. "The proposed reductions were larger than the administration had indicated in guidance given to the insurance industry in December. Jonathan Blum, a top Medicare official, cited the “historically low growth in Medicare per capita spending” as a reason for the proposal...Experts often focus on the benchmarks used to calculate changes in Medicare payments to private plans. The administration proposed to reduce these benchmarks by 1.9 percent in 2015. Other factors in the formula will deepen the cuts." Robert Pear in The New York Times.

Plan to limit some drugs in Medicare is criticized. "The proposed rule, which would lift a requirement that insurers cover “all or substantially all” drugs in certain treatment areas, is just one of a series of changes to the drug program that are being opposed by the unlikely alliance. Even insurers and drug benefit managers, who have previously supported added limits on drug coverage, oppose the rule. They object to provisions including changes to so-called preferred pharmacy networks, where consumers are steered toward a limited network of pharmacies, and to reducing the number of plans that insurers can offer in any one region." Katie Thomas and Robert Pear in The New York Times.

Health care law’s small-business marketplace not attracting many small businesses. "Small-business owners, who were supposed to gain more choices and cheaper rates from the new online-health-insurance portals, have been slow to select plans through marketplaces since the rollout started last fall. In part, some say, that is because luring employers to the marketplaces has taken a back seat to fixing technical problems and recruiting individuals and families. As a result, businesses in many states have been left with an online-shopping portal that is only partially functional — if they have one at all." J.D. Harrison in The Washington Post.

Court rules against Notre Dame in contraception case. "The 7th U.S. Circuit Court of Appeals in Chicago in a 2-1 ruling agreed with a lower court that had turned away the school's request for a temporary injunction sparing it from the federal health law's contraception requirement...The university has argued the Affordable Care Act's compromise arrangement allowing religiously-affiliated nonprofits to let insurance companies handle the provision of birth control is inadequate, because it still forces the university to be complicit in something it believes to be immoral. Judge Richard Posner, who wrote the majority opinion, was dismissive of the claim." Louise Radnofsky and Brent Kendall in The Wall Street Journal.

Numbers in context interlude: What 1.5 million looks like in balloons.

3. It's not quite an 'Army of one,' but it's getting there

Pentagon unveils plan to shrink army to pre-World War II level. "Defense Secretary Chuck Hagel plans to shrink the United States Army to its smallest force since before the World War II buildup and eliminate an entire class of Air Force attack jets in a new spending proposal that officials describe as the first Pentagon budget to aggressively push the military off the war footing adopted after the terror attacks of 2001. The proposal, described by several Pentagon officials on the condition of anonymity in advance of its release on Monday, takes into account the fiscal reality of government austerity and the political reality of a president who pledged to end two costly and exhausting land wars. A result, the officials argue, will be a military capable of defeating any adversary, but too small for protracted foreign occupations." Thom Shanker and Helene Cooper in The New York Times.

U.S. military unveils plan to cut personnel costs. "Defense Secretary Chuck Hagel is set Monday to recommend a limit on military pay raises, higher fees for health-care benefits and less generous housing allowances to prune billions of dollars in benefits from the defense budget, setting up an election-year confrontation with veterans groups and lawmakers. Faced with steadily increasing military personnel costs that threaten to overwhelm an ever-tighter budget, Mr. Hagel is also expected to include a one-year freeze on raises for top military brass—a gesture meant to show that the best-compensated leaders also will make sacrifices." Dion Nissenbaum and Julian E. Barnes in The Wall Street Journal.

Have we been living in an age of austerity? "ow could I conceivably consider the past few years to be an age of austerity? I'd argue that you must consider the stance of fiscal policy relative to the environment we're in. And for the past few years, we've been recovering from the worst recession since the Great Depression, and in that environment it makes sense that the government will do what it can to make up for a massive shortfall in demand. Except, the government has been doing a lot less to stimulate the economy for each of the past few years." Zachary A. Goldfarb in The Washington Post.

Role reversal interlude: A homeowner forecloses on a Bank of America branch.

4. Climate change's fiscal fires

Obama to propose shift in wildfire funding. "President Obama’s annual budget request to Congress will propose a significant change in how the government pays to fight wildfires, administration officials said, a move that they say reflects the ways in which climate change is increasing the risk for and cost of those fires...The proposal will ask Congress to pay the costs of fighting extreme wildfires in the same way it finances the federal response to disasters like hurricanes and tornadoes, the officials said." Coral Davenport in The New York Times.

As smart-grid funding winds down, energy leaders assess progress. "When an Arlington-based organization of power suppliers won a $33.9 million federal grant to modernize the electrical grid, its chief scientist, Craig Miller, expected customers to resist having “smart” energy meters installed at their homes. The meters were designed to provide more data about energy consumption in real time, alerting utilities sooner of power outages, but they might also arouse concerns about data privacy and radiation, he thought. Miller, who works for the National Rural Electric Cooperative Association, found much less opposition than he expected. Among co-ops the association surveyed, about 70 percent had expected customers to express concern about the meters before they were installed, but only 6 percent cited customer resistance as a barrier afterwards." Mohana Ravindranath in The Washington Post.

Interview: Daniel Yergin on the mix of renewable and conventional energy sourcesErin Ailworth in The Boston Globe.

Railroads transporting oil tighten safety. "The measures, which did not involve public comments, include lowering speed limits for oil trains in some cities, increasing the frequency of track inspections, adding more brakes on trains and improving the training of emergency medical workers. The Department of Transportation said these steps would be taken quickly and that it was still considering other longer-term measures. Still, the announcement fell short of what many analysts and independent rail experts have said is needed to ensure the safe movement of oil trains; they have called on the government to quickly retire or ban the use of older tank cars, known as DOT-111s, that have long been known to rupture in a crash. Also, the new measures do not modify current regulations that railroads must follow to determine whether trains carrying hazardous materials need to be rerouted from heavily populated areas or environmentally sensitive zones." Jad Mouawad and Ian Austen in The New York Times.

Supreme Court to consider EPA’s authority to regulate greenhouse gases. "The new case, which will be heard Monday, has all the makings of a showdown. The court has consolidated a host of challenges; just listing all the parties takes eight pages of one of the briefs. An extra 30 minutes has been scheduled for justices to examine the innards of the Clean Air Act, which has been described as one of the most complicated pieces of legislation on the planet." Robert Barnes in The Washington Post.

Education wonk interlude: Oklahoma schools get mandate to teach financial literacy.

5. Why we need the Frye standard

Opponents of same-sex marriage take 'bad-for-children' argument to court. "In a federal court in Detroit starting Tuesday, in the first trial of its kind in years, the social science research on family structure and child progress will be openly debated, with expert testimony and cross-examination, offering an unusual public dissection of the methods of sociology and the intersection of science and politics. Scholars testifying in defense of Michigan’s constitutional ban on same-sex marriage aim to sow doubt about the wisdom of change. They brandish a few sharply disputed recent studies — the fruits of a concerted and expensive effort by conservatives to sponsor research by sympathetic scholars — to suggest that children of same-sex couples do not fare as well as those raised by married heterosexuals." Erik Eckholm in The New York Times.

Ohio gay-marriage push divides some advocates. "Supporters of same-sex marriage have had many victories in recent years, in courts, in state legislatures and at the ballot box. Yet one prize has remained elusive: a reversal by voters in one of the 29 states, mostly in the South and Midwest, with constitutional bans on same-sex marriage. Activists in Ohio want to see those dominoes start to fall here, and they say they have gathered the signatures for a ballot measure to repeal an amendment adopted by 62 percent of voters in 2004" Trip Gabriel and Sheryl Gay Stolberg in The New York Times.

Oh Internet interlude: A Tumblr dedicated to experimental music on children's television.

Wonkblog Roundup

Have we been living in an age of austerity? Zachary A. Goldfarb.

How rich is too rich? It depends on where you liveChristopher Ingraham.

Wal-Mart says it’s ‘neutral’ on a minimum wage hike. Lobbying disclosures suggest otherwiseLydia DePillis.

Why is the Obama administration using taxpayer money to back a nuclear plant that’s already being built? Steven Mufson.

Don’t panic. But there’s a global coffee shortageJia Lynn Yang.

President Obama has jettisoned deficits as an issue. The American people agreeZachary A. Goldfarb.

For a glimpse at emerging market problems, follow the gold… Howard Schneider.

Liberals didn’t kill Obama’s Social Security cuts. Republicans didZachary A. Goldfarb.

Et Cetera

Some cities are promising free college to high school students. Does it workNora Caplan-Bricker in The New Republic.

With immigration reform stalled, attention turns to deportationsJulia Preston in The New York Times.

Obama seeks to defuse tensions among DemocratsKaren Tumulty in The Washington Post.

As midterms loom, aisle gets widerColleen McCain Nelson in The Wall Street Journal.

Got tips, additions, or comments? E-mail us.

Wonkbook is produced with help from Michelle Williams.

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Zachary A. Goldfarb · February 21