Share story

WASHINGTON — Federal Reserve officials in August 2007 remained skeptical that housing foreclosures could cause a financial crisis, just days before the Fed was jolted into action, according to transcripts that the central bank published Friday.

Worries about the health of financial markets dominated a meeting of the Fed’s policymaking committee Aug. 7, but officials decided there was not yet sufficient evidence that the problems were affecting the growth of the broader economy.

Just three days later, the Fed’s chairman, Ben Bernanke, convened an early-morning conference call to inform them that the central bank had been forced to start pumping money into a financial system that was suddenly seizing up.

More than five years later, the system remains heavily dependent on those pumps.

“The market is not operating in a normal way,” Bernanke said on that August call, in a moment of historic understatement. “It’s a question of market functioning, not a question of bailing anybody out. That’s really where we are right now.”

The actual conversations from the Fed’s meetings are released once a year after a five-year delay. With a wealth of detail beyond the terse statements and formal minutes issued in the hours and weeks after the meetings, the transcripts provide fresh insights into the debates, actions and judgment of policymakers.

August 2007 was the month that the Fed began its long transformation from somnolence to activism. Bernanke and his colleagues would continue to wrestle with misgivings about the extent of the Fed’s powers and about the limits of appropriate action. At times they would hesitate or move slowly. At times they even would reverse course, most important in standing by as Lehman Brothers collapsed the following year. But it is now widely accepted that their efforts helped to arrest the economic chaos unleashed by the financial crisis.

Beginning in September 2007, the Fed cut interest rates and took extraordinary steps to try to ease credit and shore up confidence in the banking system. Throughout the year, the housing crisis deepened. Home prices weakened. Subprime mortgages soured.

As foreclosures rose, banks and hedge funds that had invested big in subprime mortgages were weighed down by worthless assets. Many had trouble getting credit to meet their expenses. The damage reached the top echelons of Wall Street. Fears rose that the U.S. banking system could topple.

At the Fed’s Oct. 30 policy meeting, Janet Yellen, then president of the Federal Reserve Bank of San Francisco, noted that the economy faced increased risks. But she didn’t foresee anything dire.

“I think the most likely outcome is that the economy will move forward toward a soft landing,” Yellen said then.

Yellen was hardly alone in feeling hopeful about the economy in October. At the same meeting, Chairman Ben Bernanke noted that housing was “very weak” and manufacturing was slowing but sounded an optimistic note.

“Except for those sectors, there is a good bit of momentum in the economy,” Bernanke said.

Earlier that October, the Dow Jones industrial average closed at an all-time high of 14,164 — nearly 4 percent above where the Dow stands now.

At the October meeting, Timothy Geithner, then president of the Federal Reserve Bank of New York and now Treasury secretary, said: “Developments of financial markets on balance since the last meeting have been reassuring. The panic has receded.”

The Fed’s most dramatic steps did not begin until December 2007.

That’s when it created the Term Auction Facility, the first in a series of new programs intended to pump money into the financial system and arranged to pump dollars into the European financial system in partnership with the European Central Bank.

By then, the economy had plunged into the recession, which would officially last until June 2009. Five years later, the economy has yet to fully recover.

And by January 2008, the Fed’s response to the crisis was in full swing.

The Fed declined Friday to comment on the discussions revealed by the transcripts.

Material from The Associated Press is included in this report.