This is a big deal. It will be our first official glimpse into policymakers’ deliberations during the crisis, or at least its earliest phases. We will gain a better understanding of what the Fed knew and when it knew it. The release of 2006 transcripts last January was fascinating for the portrait painted of Fed officials failing to grasp the grave peril facing the economy; the 2007 transcripts should show us when and how that assessment changed—and how they came to take some early actions to combat it. Here is what to expect out of the transcripts, based on both minutes of the meetings and my reporting over the years with people who were in the room:
A slide toward pessimism. Recall that 2007 was a year in which the U.S. economy largely held up—the recession didn’t begin until December. But it was also a year in which long-building fissures in the global financial system started to become evident. The start of the global financial crisis can be dated to Aug. 9, 2007, when the European Central Bank first intervened to prop up the continent’s banks. But in the months before that, there had been a steady simmer of worrisome news as financial markets grew jumpy: The Dow Jones industrial average dropped 416 points (3.3 percent) drop on Feb. 27, and the market suffered a series of hairy days in July. Outwardly, Fed officials remained relatively optimistic that the U.S. economy would emerge from the troubles unscathed (“Problems in the subprime mortgage market seem likely to be contained,” Chairman Ben Bernanke testified on May 28, 2007, a comment that has haunted him for years). But that alarm was building steadily over the course of the year. Fed officials didn’t expect things to get as bad as they eventually would, but worry began swirling around the FOMC's mahogany table.
Separating banking problems from the economy. Throughout the early phases of the crisis, Fed officials tried to separate the problems emerging in the global banking system from the risks to the U.S. economy. That was the rationale behind an Aug. 17, 2007, cut in the “discount rate,” of emergency lending to banks. It was an effort to isolate emerging problems in bank funding markets without affecting the cost of credit in the economy as a whole. They followed that action in December by pumping billions into the banking system through the “Term Auction Facility.”
The rise of dissent. The FOMC had been a peaceful place for most of Bernanke’s run as chairman, with no dissents on policy in 2006 or the first five meetings of 2007. But as financial conditions tightened, factions started to emerge on the committee. Bernanke and New York Fed president Timothy Geithner led a contingent that saw the summer's financial strains as dire risks to the economy and argued for easing monetary policy. Many of their colleagues were more reluctant, seeing no need to ease policy while the economy was doing okay and there was a threat of inflation. Officials have dissented at most meetings since then.
Personal clashes. Along with those substantive arguments over the severity of the crisis ahead were some personal disputes. Geithner and Richmond Fed president Jeffrey Lacker in particular locked horns often. They had philosophical differences. Geithner was eager to intervene to try to stabilize the financial system; Lacker was more inclined to let markets do their work and allow banks to suffer for making bad bets. But there was also some bureaucratic turf in play. As New York Fed president, Geithner saw his jobs as overseeing the financial system as a whole, but Lacker’s Richmond Fed regulated two of the country’s largest banks, Bank of America and Wachovia, both based in Charlotte, N.C. In one tense moment described to me by people in the room, there was a dispute over conversations that Geithner had held with Bank of America's chief executive, Ken Lewis. Those disagreements are not merely fodder for Fed gossip -- they will show how policymaking works in practice.
Rescuing Europe. On Dec. 12 ,2007, the FOMC, along with other international central banks, announced new moves to prop up the global banking system. At the time, the term auction facility was being used as a tool to push money into a troubled banking system without the stigma of banks having to go to the discount window to request emergency funds. We now know, thanks to disclosures required by the Dodd-Frank Act and freedom of information lawsuits, that the loans went overwhelmingly to the U.S. affiliates of European banks. It will be interesting to see how explicit the committee members were in discussing the risks of using the Fed’s resources to help institutions an ocean away.
These eagerly awaited documents will be an essential part of the historical record of this crucial early phase of the financial crisis. Look for full coverage at Wonkblog.