Fed critical of ‘erratic’ European response to 2008 crisis

Transcripts show US policymakers’ view that ECB slow to appreciate scale of problem

Ben Bernanke: described European response as “striking”. Photograph: Gary Cameron/Reuters

Ben Bernanke: described European response as “striking”. Photograph: Gary Cameron/Reuters


The US Federal Reserve worried about “erratic” and “uncoordinated” European approaches to the financial crisis in the wake of the collapse of Lehman Brothers and believed the ECB found it hard to appreciate the imminent economic disaster.

Newly released transcripts from the US Fed’s 2008 meetings illustrate how concern about the global financial system built slowly throughout the year, before the failure of Lehman in mid-September prompted action the following month. They also suggest that the Fed itself took some time to appreciate the gravity of developments, with the monetary authority actually taking some time to debate a rate increase at its September gathering.

At a meeting on October 7th, then Fed chairman Ben Bernanke portrayed an “extraordinary situation” that was “creating enormous risks for the global economy” but this reaction came three weeks after the Lehman bankruptcy.

Again at the October 7th meeting, Mr Bernanke described as “striking” the European response to the crisis.

“One feature of the last few days is how striking, how uncoordinated, and how erratic some of the fiscal approaches have been – particularly in Europe, where there has been a remarkable lack of coordination in the European Union.”

Mr Bernanke underlined the importance of central banks working closely together and holding “a similar view of global economic conditions”.

He said the European Central Bank had “had some difficulty coming to the realisation that Europe would be under a great deal of stress and was not going to be decoupled from the United States”.

The following day brought a coordinated rate cut from all of the world’s major central banks, including the Fed and the ECB, but this failed to stem the damage to the world’s financial system. In the case of the Republic, this culminated in the bailout of November 2010.

Ireland featured briefly in the Fed’s considerations as the country’s housing market tipped into downfall, with the transcripts making reference to this in August and October in the context of the wider European economy.

The Fed also noted at the start of 2008 that an overreliance on credit ratings seen in the US was possibly “even more pronounced in Europe”.

The policymakers had some time for levity, joking about declining restaurant reservations and a drop-off in appointments for plastic surgery as the situation worsened.

The then president of the San Francisco Fed and now chairwoman of the board Janet Yellen said her contacts had reported widespread spending reductions.

“For example, East Bay plastic surgeons and dentists note that patients are deferring elective procedures,” she said, also observing that reservations were no longer needed at many high-end restaurants.

“And the Silicon Valley Country Club, with a $250,000 entrance fee and seven- to eight-year waiting list, has seen the number of would-be new members shrink to a mere 13.”