a financial crisis is a terrible thing to waste: rapid learning at the federal reserve, erik soell

© 2014 Federal Reserve Bank of St. Louis | Not for Public Release

Rapid Learning at the Fed“a financial crisis is a terrible thing to waste”

May 14, 2014

Erik Soell

Director

Rapid Communications at the St. Louis Federal Reserve Bank

© 2014 Federal Reserve Bank of St. Louis 2

Information is giving out; communication is getting through

(Syndey J. Harris)

These are my views and not necessarily those of the

Federal Reserve Bank of St. Louis nor the Federal Reserve System.


Pop Quiz

Q1: True or false: The Federal Reserve produces both coin and paper currency.


Pop Quiz

Q2: What major anniversary is the Federal Reserve is celebrating this year?


Pop Quiz

Q3: True or False: The Federal Reserve was born out of a secret meeting between elite businessmen who met at Jekyll Island, GA?


First, a Few Things about the Fed

• The Federal Reserve was created by Congress in 1913 with an important mission:

Influence the supply of money and credit

Respond to financial panics

Regulate and supervise financial institutions

Serve as a banking and fiscal agent for the U.S. government


How Does the Federal Reserve Function?

A balance of power

• 7 Members of the Board of Governors in Washington, D.C.

• 12 Federal Reserve Bank Presidents

• Public-private partnership in votes on monetary policy decisions (7 Governors; 5 Presidents)

Arms-length from partisan politics

• Members of the Board of Governors are appointed by the President and confirmed by Congress

• Federal Reserve Presidents are selected by the local Board of Directors and approved by the Board of Governors

Budget autonomy

• Expenses covered through securities investments held for Open Market Operations

• All excess revenues returned to the Treasury ($88B in 2013)


Source: BLS and Loan Performance -Haver Analytics

The Bust in the Housing Market Was the Obvious Cause of the Financial Crisis


“Conventional” mortgages were generally sold to Fannie Mae and

Freddie Mac

“Nonprime” mortgages were

pipelined through mortgage

companiesMortgages were

then transformed into

“mortgage-backed securities”

The U.S. “spread the risk”

Moreover, Large Investment Banks Were at the Epicenter because of Their Role in

Creating Securities from Mortgages


The Decline in House Prices Was Fast and Extended

Source: Federal Housing Finance Agency Seasonally Adjusted Expanded HPI


The Resulting Crisis Required a Massive Response

Fed

• Eased monetary policy and provided funds (liquidity) to stabilize financial markets both domestically and internationally

US Government

• Funded the Troubled Asset Relief Program, the $800 billion economic stimulus, Cash for Clunkers, Homebuyer Tax Credit, and extended unemployment benefits

FDIC

•Raised bank deposit insurance limits and provided other bank debt guarantees

First responders to

the financial crisis


The Headlines

http://picasaweb.google.com/lh/photo/dEdtRFJ6XX4UknRmxWfKTA?authkey=Gv1sRgCOWcs5m5waORKw&feat=embedwebsite

http://picasaweb.google.com/lh/photo/dEdtRFJ6XX4UknRmxWfKTA?authkey=Gv1sRgCOWcs5m5waORKw&feat=embedwebsite

http://picasaweb.google.com/lh/photo/NbiaptzoGmSneZ3q5Sap3w?authkey=Gv1sRgCOWcs5m5waORKw&feat=embedwebsite

http://picasaweb.google.com/lh/photo/NbiaptzoGmSneZ3q5Sap3w?authkey=Gv1sRgCOWcs5m5waORKw&feat=embedwebsite

http://picasaweb.google.com/lh/photo/lJKSfT17uhoHHpnqGRU4tw?authkey=Gv1sRgCOWcs5m5waORKw&feat=embedwebsite

http://picasaweb.google.com/lh/photo/lJKSfT17uhoHHpnqGRU4tw?authkey=Gv1sRgCOWcs5m5waORKw&feat=embedwebsite

http://picasaweb.google.com/lh/photo/BZHTRBGJhzzHyEeVQLTAYQ?authkey=Gv1sRgCOWcs5m5waORKw&feat=embedwebsite

http://picasaweb.google.com/lh/photo/BZHTRBGJhzzHyEeVQLTAYQ?authkey=Gv1sRgCOWcs5m5waORKw&feat=embedwebsite


Former Chairman Bernanke’s View

“… it was kind of like

you’re in a car wreck

or something. You’re

mostly involved in

trying to avoid going

off the bridge. And

then, later on, you

say: ‘Oh my God.’”

Source: Brookings Institute, January 16, 2014


The Federal Reserve’s Response to the Financial Crisis

• Reduced the federal funds rate to near zero (traditional policy)

• Expanded traditional lending programs to banks (traditional policy)

• Created emergency loan packages for AIG and Bear Stearns, using the “unusual and exigent” provisions of the Federal Reserve Act

• Executed broad-based lending to financial markets, using the “unusual and exigent” provisions of the Federal Reserve Act


The Actions of the Federal Reserve, Treasury, and the FDIC Prevented a

Collapse of the Financial System…

Source: British Bankers Associations and Reuters


However, We Did Not Avoid a “Great Recession”

Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis, U.S. Department of Commerce: Bureau of Economic Analysis


Quantitative Easing from a Balance Sheet Perspective

Nontraditional monetary policy tool: Large Scale Asset Purchases (QE1, QE2, and QE3)

Lending and liquidity programs to respond to the financial crisis

Source: Federal Reserve Board


The Result Has Been a Gradual Decline in the Unemployment Rate

Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis, U.S. Department of Commerce: Bureau of Economic Analysis


Failed Banks and Thrifts

Source: FDIC

• Most do not realize that over 500 community banks have failed over the last five years.


There Are Still a Large Number of “Problem” Banks

Source: FDIC


Beyond Banking, Housing Issues Remain in Some Parts of the Country

8.76%

4.99%

0

2

4

6

8

10

Pe

rce

nta

ge (

%)

January 2007-December 2013

U.S. Percentage of Seriously Delinquent LoansAs of December 31, 2013

Source: Core Logic


“It’s a Phone Call”

• <video removed>


The Secret Sauce

Concept paper Start small

Phone management

Governance

Revisions along the way

Luck: life favors the prepared


Timeline

1st session (August 2008)

State examiners

invited (May 2009)

100th

session (March 2010)

CEUs offered

(January 2011)

250th

session February

2012)

Mandatory sessions (January

2013)

500th

session (estimated

August 2014)


Data

Over 88,000 total registrations received

Over 25,000 surveys receivedOver 7,000 continuing

education units awarded

All time average:

93% agree the sessions met their needs

First 12 months averaged 5 sessions per month;

Last 12 months averaged 9 sessions per month

All time average:

90% agree the sessions provide better understanding

of banking and regulatory environment

Largest session by registration:

July 24, 2013: 1,589

All time average:

188 registrations per session

Eight core programs with several ad hoc and spin off

programs


Current Programs


Have fun with your brand


Questions

a financial crisis is a terrible thing to waste: rapid learning at the federal reserve, erik soell

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