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Fed docs show Bernanke, board perplexed in handling 2008 crisis

The Federal Reserve agonized in 2008 over how far to go to stop a financial crisis that threatened to cause a recession, and at times struggled to recognize the speed and magnitude of the meltdown.

"We're crossing certain lines. We're doing things we haven't done before," then-Chairman Ben Bernanke said as Fed officials met in an emergency session on March 10, 2008, and launched never-before-taken steps to lend to teetering Wall Street firms.

The Fed Friday released hundreds of pages of transcripts covering its 14 meetings during 2008 -- eight regularly scheduled meetings and six emergency sessions. The Fed releases full transcripts of each year's policy meetings after a five-year lag.

The 2008 transcripts cover the most tumultuous period of the crisis, including the collapse and rescue of investment bank Bear Stearns, the government takeover of mortgage giants Fannie Mae and Freddie Mac, the decision to let investment bank Lehman Brothers fold in the largest bankruptcy in U.S. history and the bailout of insurer American International Group.

For all its aggressive steps in 2008, the transcripts show the Fed failing at times to grasp the size of the catastrophe they were dealing with. Bernanke and his top lieutenants often expressed puzzlement that they weren't managing to calm panicky investors.

As late as Sept. 16, 2008, a day after Lehman Brothers filed for bankruptcy, Bernanke declared, "I think that our policy is looking actually pretty good."

The Fed declined at that meeting to cut its benchmark short-term rate. Yet just three weeks later, after the Fed had rescued AIG, Bernanke felt compelled to call an emergency conference call. In it, he won approval for a half-point rate cut.

The transcripts show that Bernanke enjoyed the support of current Fed chairwoman Janet Yellen, who succeeded Bernanke this month, for the unconventional policy actions he was pushing. At the time, Yellen was head of the Fed's San Francisco regional bank.

At an Oct. 28-29 Fed meeting, Yellen noted the dire events that had occurred that fall. With a nod to Halloween, she said the Fed had received "witch's brew of news."

"The downward trajectory of economic data," Yellen said, "has been hair-raising."

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