Lessons Learned from the Financial Crisis: A Brief History of the Federal Reserve and the Fed's Responses to Past Crises

Julie Stackhouse looks at the Fed's roles and responsibilities, including its response in the aftermath of the attacks of 9/11, when the Fed stepped in to stop the panic in the financial markets and then stepped out when the crisis passed. The Fed repeated and expanded these actions a decade later during the financial crisis.

Presentation (PDF)

• Part 1: Welcoming Remarks | James Bullard (8:40)
• Part 2: Responses to the Pre-Event Survey | Julie Stackhouse (2:41)
• Part 3: A Brief History of the Federal Reserve and the Fed's Responses to Past Crises (7:25)
• Part 4: The Beginnings of the Most Severe Financial Crisis since the Great Depression (10:07)
• Part 5: The Housing Bubble and Its Ramifications (9:53)
• Part 6: The Federal Reserve as a "First Responder" to the Crisis (9:37)
• Part 7: Avoiding a Financial Collapse, but not the Great Recession (8:18)
• Part 8: Lessons Learned from the Crisis (7:21)
• Part 9: Question-and-Answer Session (26:26)

Transcript:

Julie Stackhouse: So that brings you up to date with what you think. Let me tell you just a little bit more about who we are at the Federal Reserve.

Jim talked about monetary policy and the important role that the Federal Reserve plays in monetary policy. It's an interesting concept, because, as you mentioned, Jim, it's not one that's just out of Washington. It's one where the presidents from the 12 Federal Reserve Banks joined, when it's full, the seven members of the Board of Governors, and come together to discuss the economic situation in the U.S. economy. And importantly, the steps that need to be taken. In a sense, some have termed it a private/public partnership, where the presidents represent you, Main Street, and where the governors, who are appointed by the president and confirmed by the Senate, represent more of the governmental interests. So it is one where there's inevitably differences of views, and in fact, intentionally the design of monetary policy.

But there are other things that the Federal Reserve does, and I pulled this from the Mission of the Federal Reserve found on the website of the Federal Reserve Board of Governors. The second one relates to what I do, supervising banking organizations. And that responsibility for banks that are headquartered in the Eighth Fed District, if they're Fed members is mine, as well as all bank holding companies. And likewise, entities that are financial firms, are supervised by other Fed districts, depending on where they fall geographically.

I'll skip to the fourth item, and that relates to providing financial services. Until just a few years ago Federal Reserve Banks used to process a whole lot of paper checks. In fact, we had something like 46 offices that processed paper checks. And then all of a sudden the debit card became the means of payment. And, in fact, I bet today if you were at the grocery store and someone writes a check when you're in line behind them, you go like this because you know it takes so long. And you're going, "use that debit card." While the world has started using debit cards or for those that used paper, they were transformed into an electronic means at the point that they were accepted. And so at this point the Federal Reserve has one site that processes checks. It's amazing in what has just happened over a few years.

But importantly, the Federal Reserve also runs the nation's large-dollar payment network, as well as processing other transactions that may be familiar to you in terms of things like your payroll, your automatic payroll, or there may be payments that you authorize from your banking organization and that bank may process them through the Federal Reserve. So we are a service provider to banks.

But let's go back to the third item because that's the one I want to focus on tonight. And that is the Fed's role in providing stability to the nation's financial system. So I want to give you one example that is not the current financial crisis in a minute. But before I do that, I'd like to step back for a minute and reflect on yesterday. Yesterday was Sept. 11, 2011, 10 years from the disaster at the World Trade Center. So I'm interested, Matthew, where were you on Sept. 11, 2001, do you remember? You've got to use your mic, by the way.

Matthew: I was in my office.

Julie Stackhouse: You were at your office. Here in downtown St. Louis?

Matthew: Yes.

Julie Stackhouse: So you were working?

Matthew: Yes.

Julie Stackhouse: Do you remember kind of the events of the day, how you heard about it?

Matthew: Well, we, it was funny, I worked for an insurance company and we had all sorts of Bloomberg's up on the ceiling and all of a sudden the numbers went away and the pictures of the tower were on the television.

Julie Stackhouse: Pretty strong impression.

Matthew: Yeah.

Julie Stackhouse: Okay. Jim, what about you, where were you?

Jim: I was at the office working also. And I kind of found out about it, I was in a meeting. They came in and announced it because a lot of the children were being released from school and stuff.

Julie Stackhouse: Yeah, okay. So I think all of us really reflected yesterday on where we were. It was an especially memorable day for me, as my family knows, because I was in New York at the Federal Reserve Bank of New York just a few blocks from the World Trade Center. And it was a really amazing day, certainly not for what, I mean, for what happened certainly, but also for some of the things that occurred alongside it. Of course, all of us ended up being sequestered in the hallways of the New York Fed, which we were, because there really was nowhere to go. You certainly weren't going to go outside. So you stayed where you were. And you waited. You waited for information. You waited to hear what was going to happen. You expressed-you experienced fear, and particularly as the first tower collapsed, and it was unclear whether or not that was the result of yet another attack or something else. But all the dust and debris that had been outside started to be brought into the building because of HVAC systems.

So all of a sudden you're thinking about your life. And really will you survive. And so there were those terrible moments and very personal. And your situations are very personal to you as well. But it's what happened after that that I found to be so amazing, because that's where the central bank stepped in. For most of you, you probably don't realize that the nation's payment systems essentially stopped working the way they should, particularly for the first day of the crisis and the day after. Some of the nation's largest banks that transfer money to really keep business running, both here in the United States and nationally, were out of business, either because they were located in the World Trade Center or because they were located nearby.

And one thing is clear. When you are in a disaster like that, you don't think about staying at work for the most part. You think about getting to your families and how you get home. So it became very obvious that the system was not working well on Sept. 11, 2001 just within hours.

Now for those of us that were in New York, we were able to call back to our own banks and see what was happening. And the banks themselves had kicked into action. And financial institutions across the country were being called and surveyed to see what their situation was. And it was at that time that the Federal Reserve stepped in. And here's a picture of what that looks like. So those lines represent essentially the Fed's response to the crisis of Sept. 11, 2001.

At that point in time one of the roles that I have, the Discount Window or Lending, the loans being made by the Federal Reserve to banking organizations for two days, Sept. 11 and Sept. 12, exceeded levels we had ever seen in the past. Of course up until the current financial crisis. But I think the thing that's so amazing, and the story that this tells, is that the Fed stepped in. It provided the stability, so everything you needed to do got done, and then the Fed stepped out. And that is really the role of providing financial stability. Being there to stop the panic, but stepping out when the panic is done. So I did want to make that point, because as we talk about the financial crisis, the Fed had a very big role. And I think sometimes when you understand the role in a smaller way, it's easier to understand it in the larger context.