Visit to the Fed

Yesterday we went to the federal reserve and received a briefing from a senior advisor named Winthrop Hambley (good name for a guy working at the Fed). We were in the meeting room where the Board of Governors convene. They actually have little gold name plates on the tops of the chairs- one of my classmates sat in Bernanke's chair. While we were receiving the briefing, the person in Bernanke's chair was battling valiantly to stay awake, but with little success.

It is amazing how active the Fed has been in trying to end the recession with actions that are unprecedented in the US. Normally when the Fed purchases assets from a bank it offsets the transaction by selling off corresponding assets. Right now the Fed is buying assets from Depository Institutions and simply crediting their accounts for the transaction amount- they are making no attempt to sell off assets. In a little more than a year, the Fed's balance sheet has almost tripled to $2.24 trillion.

Back in March of 2008, the Fed created a Primary Dealer Credit Facility (PFDC) so that it could make available overnight loans to primary deals- firms that were not depository institutions (the normal recipients of Fed loans). This was in response to the near failure of Bear Stearns. Even this new facility was not enough to save Lehman Brothers in September of 2008- an event that triggered the global economic collapse.

I asked Winthrop if in retrospect it had been a mistake to let Lehman Brothers fail. He stated that it was a subject that historians would be debating for decades. His view was that if Lehman had been saved, another investment bank or similar institution would have been the catalyst for the crisis.Best book I've read on the subject so far is Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System---and Themselves

Bernanke absolutely missed some key indicators about the seriousness of the housing bubble, but once the crisis started, I can't imagine a better Fed Chairman. The current unemployment rate (10%) is atrocious, but without Bernanke's actions,we could easily be looking at levels unseen since the Great Depression.