By Ylan Q Mui
As the nation’s financial system teetered on the brink of collapse seven years ago, top officials at the Federal Reserve huddled inside their marbled headquarters in Washington to brainstorm what it would take to save the American economy.
They called it “blue-sky thinking,” and then-Fed Chairman Ben S Bernanke led the exercises. The goal was to come up with the most creative, most aggressive, most powerful strategies the central bank could pursue to fight the worst economic downturn in nearly 70 years. The list was long, and freed from the political and financial constraints of the real world, the suggestions at times felt faintly fictitious. But in fact, the country would require more help than the Fed ever imagined.
The central bank’s stimulus campaign was more massive and lasted longer than anyone had anticipated. The brainstorming sessions generated many of the ideas the Fed initially deployed to arrest the financial crisis. But even blue-sky thinking didn’t anticipate the grinding pace of the nation’s recovery, and officials repeatedly found themselves reaching beyond the horizon.
Their historic effort is finally coming to an end. This month, the central bank announced it is beginning to phase out its support for the American economy. This is the final tally of its work: Seven years with the Fed’s influential interest rate at zero. A $4trn balance sheet, more than quadruple the previous size. And an assurance that the return to normal — whatever that means now — will be gradual, to limit any pain.
“I thought the recovery would happen more quickly,” said Don Kohn, second-in-command at the central bank during the crisis and now a senior fellow at the Brookings Institution. The financial crisis unfolded fast and furious, but the recovery has been a slow burn.
Over a single weekend in September 2008, the collapse of investment bank Lehman Brothers and turmoil within insurance giant AIG whipsawed the American economy. The typically staid Fed sprung into action, improvising new tools to avert what might have been another Great Depression. It launched emergency lending programs to backstop the financial system, including the controversial $800 billion bailout of the nation’s biggest banks. It slashed the target for the interest rate that banks charge to lend to each other overnight — the federal funds rate — all the way to zero in hopes of unclogging the credit markets that keep the economy humming. And it began buying the mortgage-backed securities that precipitated the downturn as panicked investors fled the market. It all went down within just four months.
The recovery, however, proved disappointing. Central bankers are fond of analogies, and they often likened the nation’s economy to a patient who had left the emergency room but remained stuck in the hospital. And even the most potent medicines could not return the economy to full health. Tens of thousands of people continued to lose their jobs for more than a year after the recovery began. The unemployment rate peaked at 10 percent in fall 2009. A record proportion of workers were out of a job for six months or longer.
The Fed was overly optimistic from the start. In March 2009, Bernanke said “green shoots” were emerging as mortgage rates fell and business lending picked up. Staff forecasts at the time predicted economic growth would rise to nearly 4 percent in the next two years and top 5 percent by 2012.
Yet even now, the recovery has not reached those speeds, stuck instead at a roughly 2 percent annual pace. The Fed has had to repeatedly move the goal line.
After lowering its benchmark rate to zero in 2008, the Fed wanted to convince markets that it would stay there for a long time. Exactly how long was a matter of debate. In 2011, it vowed to hold the rate at zero until at least mid-2013. Then officials moved the date to 2014 — and again to 2015. Finally, the Fed gave up on a timeline and instead committed to keeping the target rate steady at least until the national unemployment rate fell to 6.5 percent or inflation rose above 2.5 percent. In reality, rates remained at zero for even longer than that.
Meanwhile, the Fed sought other ways to jump-start the recovery. It ramped up the amount of money it pumped into the economy by buying long-term assets, a strategy known as quantitative easing. The initial round of purchases, launched during the crisis, totaled $600bn of mortgage-backed securities and debt of housing giants Fannie Mae and Freddie Mac. It expanded the effort several times through 2010 until the total reached about $1.7 trillion. But just months after the Fed ended the program, it was clear the economy needed more help. It launched a second round that fall and announced a third in 2012. Together, they added up to more than $2trn in economic stimulus.
Bernanke likened the programs to booster rockets that would propel the recovery forward. Skeptics say they worked more like a hoverboard, just keeping the economy afloat. Washington also thwarted the recovery with deep government spending cuts and partisan brinksmanship that threatened the nation’s credit rating. Overseas, Europe’s fragile economic and political union nearly came undone — twice — as countries buckled under crippling debt.
Seven years to the day after the Fed took its benchmark rate all the way to zero, Chair Janet L. Yellen announced that the central bank is starting to reverse course. The Fed raised its target rate by a quarter percentage point this month, the beginning of the end of its long campaign to revive the American economy.
Yellen cast the decision as a sign the recovery has taken root and can withstand the growing headwinds from plunging oil and commodity prices and a slowdown in China. The decision came down to the Fed’s final meeting of the year.
There are hints of new bubbles emerging. Two of the Fed’s staunchest supporters of stimulus, Williams and Boston Fed President Eric Rosengren, warned that years of low rates may have driven investors to seek bigger returns in riskier corners of the market, such as commercial real estate. Many others turned to high-yield junk bonds, which came under pressure this month after large losses at one prominent fund, Third Avenue Capital, forced it to bar investors from pulling out.
But if the past seven years have proven anything, it’s that the biggest danger is often the one that no one sees coming.
Washington post
By Ylan Q Mui
As the nation’s financial system teetered on the brink of collapse seven years ago, top officials at the Federal Reserve huddled inside their marbled headquarters in Washington to brainstorm what it would take to save the American economy.
They called it “blue-sky thinking,” and then-Fed Chairman Ben S Bernanke led the exercises. The goal was to come up with the most creative, most aggressive, most powerful strategies the central bank could pursue to fight the worst economic downturn in nearly 70 years. The list was long, and freed from the political and financial constraints of the real world, the suggestions at times felt faintly fictitious. But in fact, the country would require more help than the Fed ever imagined.
The central bank’s stimulus campaign was more massive and lasted longer than anyone had anticipated. The brainstorming sessions generated many of the ideas the Fed initially deployed to arrest the financial crisis. But even blue-sky thinking didn’t anticipate the grinding pace of the nation’s recovery, and officials repeatedly found themselves reaching beyond the horizon.
Their historic effort is finally coming to an end. This month, the central bank announced it is beginning to phase out its support for the American economy. This is the final tally of its work: Seven years with the Fed’s influential interest rate at zero. A $4trn balance sheet, more than quadruple the previous size. And an assurance that the return to normal — whatever that means now — will be gradual, to limit any pain.
“I thought the recovery would happen more quickly,” said Don Kohn, second-in-command at the central bank during the crisis and now a senior fellow at the Brookings Institution. The financial crisis unfolded fast and furious, but the recovery has been a slow burn.
Over a single weekend in September 2008, the collapse of investment bank Lehman Brothers and turmoil within insurance giant AIG whipsawed the American economy. The typically staid Fed sprung into action, improvising new tools to avert what might have been another Great Depression. It launched emergency lending programs to backstop the financial system, including the controversial $800 billion bailout of the nation’s biggest banks. It slashed the target for the interest rate that banks charge to lend to each other overnight — the federal funds rate — all the way to zero in hopes of unclogging the credit markets that keep the economy humming. And it began buying the mortgage-backed securities that precipitated the downturn as panicked investors fled the market. It all went down within just four months.
The recovery, however, proved disappointing. Central bankers are fond of analogies, and they often likened the nation’s economy to a patient who had left the emergency room but remained stuck in the hospital. And even the most potent medicines could not return the economy to full health. Tens of thousands of people continued to lose their jobs for more than a year after the recovery began. The unemployment rate peaked at 10 percent in fall 2009. A record proportion of workers were out of a job for six months or longer.
The Fed was overly optimistic from the start. In March 2009, Bernanke said “green shoots” were emerging as mortgage rates fell and business lending picked up. Staff forecasts at the time predicted economic growth would rise to nearly 4 percent in the next two years and top 5 percent by 2012.
Yet even now, the recovery has not reached those speeds, stuck instead at a roughly 2 percent annual pace. The Fed has had to repeatedly move the goal line.
After lowering its benchmark rate to zero in 2008, the Fed wanted to convince markets that it would stay there for a long time. Exactly how long was a matter of debate. In 2011, it vowed to hold the rate at zero until at least mid-2013. Then officials moved the date to 2014 — and again to 2015. Finally, the Fed gave up on a timeline and instead committed to keeping the target rate steady at least until the national unemployment rate fell to 6.5 percent or inflation rose above 2.5 percent. In reality, rates remained at zero for even longer than that.
Meanwhile, the Fed sought other ways to jump-start the recovery. It ramped up the amount of money it pumped into the economy by buying long-term assets, a strategy known as quantitative easing. The initial round of purchases, launched during the crisis, totaled $600bn of mortgage-backed securities and debt of housing giants Fannie Mae and Freddie Mac. It expanded the effort several times through 2010 until the total reached about $1.7 trillion. But just months after the Fed ended the program, it was clear the economy needed more help. It launched a second round that fall and announced a third in 2012. Together, they added up to more than $2trn in economic stimulus.
Bernanke likened the programs to booster rockets that would propel the recovery forward. Skeptics say they worked more like a hoverboard, just keeping the economy afloat. Washington also thwarted the recovery with deep government spending cuts and partisan brinksmanship that threatened the nation’s credit rating. Overseas, Europe’s fragile economic and political union nearly came undone — twice — as countries buckled under crippling debt.
Seven years to the day after the Fed took its benchmark rate all the way to zero, Chair Janet L. Yellen announced that the central bank is starting to reverse course. The Fed raised its target rate by a quarter percentage point this month, the beginning of the end of its long campaign to revive the American economy.
Yellen cast the decision as a sign the recovery has taken root and can withstand the growing headwinds from plunging oil and commodity prices and a slowdown in China. The decision came down to the Fed’s final meeting of the year.
There are hints of new bubbles emerging. Two of the Fed’s staunchest supporters of stimulus, Williams and Boston Fed President Eric Rosengren, warned that years of low rates may have driven investors to seek bigger returns in riskier corners of the market, such as commercial real estate. Many others turned to high-yield junk bonds, which came under pressure this month after large losses at one prominent fund, Third Avenue Capital, forced it to bar investors from pulling out.
But if the past seven years have proven anything, it’s that the biggest danger is often the one that no one sees coming.
Washington post
