20 Jan 2013

Papers suggest Fed underestimated global crisis

10:47 am on 20 January 2013

Newly released documents from the United States' central bank, the Federal Reserve, suggest it underestimated the threat of a global financial crisis as the first signs emerged five years ago.

Transcripts of meetings held at the Fed in late 2007 show it was aware of the risks, but chairman Ben Bernanke declared he did not expect any major financial institutions to become insolvent.

The documents suggest Mr Bernanke wanted to hold off from addressing rising panic in the markets, the BBC reports.

Yet many US banks and other financial firms had to be rescued in 2008.

Most of the country's major lenders discovering billion-dollar losses linked to bad mortgage debt as the housing market collapsed. Investment banks such as Bear Stearns needed government funds ahead of being sold off cheaply, while another, Lehman Brothers, was ultimately closed down.

The US government also had to bail out the federal mortgage agencies Fannie Mae and Freddie Mac.

Geithner also appeared unconcerned

The released documents also suggest current US Treasury Secretary Timothy Geithner underestimated the crisis.

Mr Geithner, who at the time was president of the New York Federal Reserve Bank, said in August of that year: "We have no indication that the major, more diversified institutions are facing any funding pressure."

In October 2007 Janet Yellen, another member of the Fed's most senior committee, the Federal Open Market Committee, said: "I think the most likely outcome is that the economy will move forward toward a soft landing."