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UV3957 November 10, 2009

This case was prepared by Associate Professor Frank Warnock. It was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright  2009 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to [email protected]. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation.

GEITHNER AND BERNANKE AMID THE GLOBAL FINANCIAL CRISIS

Valentine’s Day 2009 had just passed, and the financial crisis that had gripped the country for the past year and a half was threatening to put a quick end to the American public’s honeymoon with President Obama. The crisis, and the Obama administration’s response to it, had the potential to determine whether the Obama presidency would be a success.

When it came to the course of U.S. economic policy, two of the top decision-makers were Tim Geithner and Ben Bernanke. Treasury Secretary Geithner and Federal Reserve (Fed) Chairman Bernanke had the eyes of the world on them as they sought policies to help get the United States—and the world—through the mess that began as a financial crisis and had morphed into a full-fledged recession and, potentially, a severe depression.

In this time of crisis, at least one thing was certain: Geithner and Bernanke would not require time to get to know one another. Indeed, they had been working closely together since November 2003, when Geithner became president of the Federal Reserve Bank of New York (FRBNY), the branch that is the Fed’s primary connection to financial and credit markets (and the large banks that reside in the New York district). Since then, except for a brief period in late 2005 when Bernanke served as head of the Council of Economic Advisors, Bernanke and Geithner had served together on the Federal Open Market Committee (FOMC), the committee that sets U.S. monetary policy. Throughout this crisis, they had been in continuous contact; Bernanke (at times almost daily, it seemed) was implementing new, nonstandard policies, and Geithner, from his previous post as head of the FRBNY, was gauging the impact on credit markets.

On this day in mid-February 2009, the news was grim. The U.S. economy had been in recession since December 2007. If the downturn lasted into early spring, as seemed likely, it would become America’s longest post-war recession. The economy had shed 3.5 million jobs over the previous 12 months, the worst 12-month period on record (employment data went back to 1939). Bank lending was plummeting; the few banks with funds available were holding onto them. With this massive shift into liquid assets (cash and cash equivalents) and away from lending of any sort (even for productive uses or, in many cases, the working capital firms needed to survive), Geithner and Bernanke knew the economy would grind to a halt. While they tried not

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to focus on the stock market, its spectacular drops were hard not to notice. In October, the stock market fell 20%, its worst monthly loss since a 23% loss in April 1932 (when the Great Depression was just getting started), and November was hardly any better (a 9% loss). The market had stabilized a bit from mid-December to mid-January, but the slide continued with the S&P 500 down more than 10% the previous few weeks. (For basic economic and financial indicators, see Exhibits 1 and 2.)

The U.S. economy was in danger of imploding. In the previous year, three of the five big investment banks had gone under; the other two converted themselves into bank holding companies. The Fed had essentially taken over the insurance behemoth AIG. Citibank, at one time the largest bank in the world, was teetering close to bankruptcy. And millions of ordinary Americans were in danger of losing their jobs, their homes, or both.

The United States was not alone in this crisis. As Figure 1 indicates, global production and trade was plummeting.1

Figure 1. Global production and merchandise trade (annualized three-month percentage change).

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Data sources: Haver Analytics and IMF staff estimates.

1 Figure 1 is an adaptation of Figure 2 from the January 2009 International Monetary Fund World Economic

Outlook update, available at http://www.imf.org/external/pubs/ft/weo/2009/update/01/index.htm (accessed October 25, 2009). D

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The virulence of the global downturn was alarming. World economic output grew at 5.2% in 2007 and 3.4% in 2008. As late as November 2008, the International Monetary Fund (IMF) was predicting 2009 global growth to be 2.2%. Soon after, in the January 2009 update of

its World Economic Outlook (WEO), the IMF marked that forecast down to 0.5%. The global extent of the downturn, as well as the severity with which growth projections were being marked down, was fully evident in the WEO update. No area escaped the downward ratcheting of growth expectations. Advanced economies, expected to shrink in 2009 by 0.3% as of November, were now predicted to shrink by 2%. Emerging markets, thought to be able to “decouple” from advanced economies and grow at 5.1% in 2009, were now expected to grow at only 3.3%. It was as if the world’s countries could be viewed on a continuum: On one end were those who were overextended, having borrowed excessively from others; on the other end were those who saved and then lent and exported to the profligate ones. Few were immune from this global downturn.

Beyond the numbers, the headlines had been brutal. Iceland essentially declared

bankruptcy in October. The currencies of many emerging market countries plummeted against the dollar in late 2008, as investors everywhere rushed back to the “safe” haven of U.S. bonds. Europe was teetering; the euro area was falling into its first-ever recession and its worst slump in 50 years. Worries persisted that Austrian and Scandinavian banks had exposure to wobbly Eastern European markets that might lead to insurmountable losses. There were rumors that the United Kingdom, which had bailed out a number of its banks, would have a currency crisis of its own. Japan was in recession yet again, with growth falling an “unimaginable” 14% in 2008Q4 and its finance minister resigning under pressure. Chinese exports recorded their biggest decline in more than a decade in January, falling 17.5% compared to a year earlier. The International Labor Organization (ILO) estimated that 23 million people in Asia would be unemployed in 2009, three times higher than its estimate just one month earlier. The list could go on and on, and the bad news within the United States and from the rest of the world just kept coming.

On this brisk mid-February day in Washington, Geithner and Bernanke rolled up their sleeves and re-evaluated their plans to address the nearly impossible task of righting the ship. In terms of monetary and fiscal policy, were they doing all they could to halt this epic slide? Were they doing too much? How Did We Get Here?2

How did the biggest economy in the world come to the brink of a depression? Geithner and Bernanke knew that would be debated for a long time to come, but one could argue that the predicament stemmed from the interaction of financial market innovation, lax internal governance and external oversight, and easy global monetary conditions.

2 The discussion in this section is based on the BIS 2008 annual report,

http://www.bis.org/publ/arpdf/ar2008e.htm (accessed October 25, 2009). D o

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Financial market innovations

Geithner and Bernanke knew that most financial market innovations are welfare- enhancing. As a reminder that financial market innovation is, in general, a good thing, one need only to picture how life would be different were there no access to credit. That said, financial market innovation often comes with substantial opacity, as innovators, to keep competition at bay, have incentives to mask the true nature of a new product. They also tend to stay at least one step ahead of regulators. As financial products develop, those that survive the test of time become more standardized and more transparent, but during periods of rapid financial innovation, new products tend to be quite opaque.

The recent financial innovation that had caused much grief was the originate-to-distribute model. Loans of questionable quality had been made and then sold, as the Bank for International Settlements (BIS, the central banks’ bank) put it, to “the gullible and the greedy.” The underlying dynamics of this source of financial stress were not new: Time and time again throughout history, financial institutions and investors would get sloppy in assessing risk.

In the end, as part of the learning process, some “tuition” was paid: those who made egregiously wrong decisions tended to suffer losses. While financial turmoil often leads to collateral damage—people and firms depend on financial institutions—learning will only take place if the tuition is steep enough. Tuition had indeed been extracted during this crisis, with Lehman Brothers (founded in 1850) and others being allowed to go bankrupt. But how does a government decide whom to bail out and whom to cut loose? Geithner and Bernanke knew they would never know the true answer. The debris from the crisis was so widely scattered that Geithner and Bernanke could not possibly know with certainty who was “too interconnected to fail” (i.e., whose failure would put the entire country at risk). And the desire to save important firms from bankruptcy was always tempered by the knowledge that the basic dynamics of a financial crisis—innovation, greed, gullibility, and the need for tuition payments—had not changed in hundreds of years.

Lax internal governance and external oversight

One needed only to look at the huge losses, write-downs, and bankruptcies in the financial sector to recognize that there had to have been colossal lapses in firms’ internal governance mechanisms. It was reasonable to expect that these deficiencies would be addressed and that surviving firms and industries would learn important lessons, but that within another decade or two, decision-makers would again get sloppy and cause the next round of financial crises. Human behavior is extremely persistent.

Regulators also had to shoulder some of the blame. In particular, it was difficult to fathom how an entire shadow banking sector—the off-balance-sheet special vehicles that were set up by traditional banks and investment banks, the enormous markets in selling “credit protection” that ostensibly insured against your counterparties’ default, but only until the insurer itself went bankrupt—could blossom without prompting substantial regulatory activity. Crises D

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inevitably beget regulatory change, and this one would be no different: the regulatory environment would likely take a turn toward stricter regulations and oversight.

Easy global monetary conditions

Global interest rates had been at a historic low, partly attributable to an improved credibility of central banks and a focus on inflation targeting, both of which lowered the premia demanded for inflation risk, and partly to beneficial supply shocks (technological progress, globalization), which helped to shift out long-run aggregate supply curves and made the jobs of central bankers seem deceptively easy. Global imbalances also kept rates low. When, for example, U.S. monetary policy was finally tightened—recall that the Fed continually raised the policy rate from mid-2004 through 2006 (Exhibit 2)—emerging markets’ policy of managing their exchange rates by purchasing long-term U.S. bonds kept long-term borrowing costs low (and stoked inflation locally and globally). Whatever the cause, global real interest rates had been abnormally low, and history shows that periods of low real interest rates often end in speculative frenzies. 2008: An Ugly Year

Geithner and Bernanke could see that the situation was desperate.

 Slumping demand was tearing the U.S. auto industry apart. As reported in the New York Times, November sales (compared with a year earlier) fell 47% at Chrysler, 42% at Nissan, and 41% at General Motors (GM). Even the big foreign car companies suffered, with sales dropping 32% at Honda, 27% at BMW, and 34% at Toyota, which would book its first annual operating loss since its launch year in 1937–38. “It feels like we’re back in 1982 right now,” Bob Carter, general manager of the Toyota Division of Toyota Motor Sales, said on a conference call. “Consumers are simply not shopping today.” Michael C. DiGiovanni, GM’s executive director for global market analysis, added: “Our industry is in a much more severe situation than the rest of the economy. It’s in an unsustainable position for all manufacturers. We cannot continue to operate at these levels or else the entire industry’s going to go down.”3 In the fall of 2008, the “Big Three” U.S. automakers went to Washington, caps in hand, seeking about $50 billion to see them through a difficult time that, according to them, was not of their own doing. GM received a $13.4 billion emergency bridge loan from the U.S. Treasury in December and was fighting to avoid bankruptcy protection. Chrysler, which received $4 billion in federal funding, was considering an equity carve-up that would help avoid bankruptcy but leave the existing equity owners (Cerberus and Daimler) with less than 10% of the company. Consumption spending, not just on cars, but on just about everything, had been falling sharply. (See Exhibit 3a on growth in economic activity and employment; Exhibit 3b for

3 Nick Bunkley, “Another Month of Miserable Auto Sales,” New York Times, December 2, 2008. D o

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the contribution of quarterly growth by the components C, I, G, and NX; and Exhibit 3c for confidence measures.)

 The housing sector was hemorrhaging (Exhibit 4). For the first time in decades, home prices were falling sharply. Permits for new home construction—a leading indicator of economic activity, in part because new homes typically generate much additional spending—were always cyclical, but these days, they were plummeting as they had in the mid-1970s.

 The federal budget was under strain (Exhibit 1). In mid-October, it was announced that the budget deficit for the fiscal year 2008 was a record $455 billion. With all of the bailouts considered by the Treasury in late 2008—and with the increased expenses (in terms of unemployment benefits, for example) and decreased tax revenues associated with a slowdown—the FY 2009 budget deficit was expected to be in the $750 billion to $1 trillion range.

 Credit markets essentially seized up. One traditional measure to summarize the strain in financial markets was the TED spread, calculated as the gap between three-month LIBOR (offshore interest rates for three-month dollar-denominated loans) and the three- month U.S. Treasury bill rate. The size of this gap was thought to reflect a risk or liquidity premium. As Exhibit 5 shows, it had reached extremely high levels. Another measure, the Baa–Aaa spread, represented the difficulty most firms would have in getting loans compared with those firms who had the best credit quality (i.e., who had Aaa credit ratings). It had reached levels not seen since the Great Depression. With credits markets not functioning, investment was falling sharply, as firms could not borrow to fund new projects.

 The risk aversion that pushed the TED and Baa–Aaa spreads to high levels also played out internationally, with money from all over the world flowing into short-term U.S. debt instruments, such as money markets and Treasury bills. (For one analyst’s description of these capital flows, see Exhibit 6).

 The Fed’s attempts to offset the massive increase in money demand associated with the flight from risky assets by increasing the size of its balance sheet (Exhibit 7) had been thwarted by a plummeting of the money multiplier.

Going Forward: What’s in Store for 2009?

Geithner and Bernanke did not know the best way forward. No one did. Each potential path was fraught with pitfalls, moral hazard, and the potential wasting of the public’s money. But neither considered doing nothing to be a viable option, and new policies were almost continuously being proposed and implemented.

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Fiscal policy: the American Recovery and Reinvestment Act of 2009

Geithner, and the entire Obama administration, was committed to a fiscal stimulus package but did not know what form it should take, only that it ought to be “substantial.” Much debate over tax cuts versus new spending took place. The Economist reported various estimates of spending multipliers.4 Direct federal spending and federal funding of state and local infrastructure had the highest (estimated) multiplier effects at anywhere from 1.0 to 2.5. Individual tax cuts had lower estimated effects (0.5 to 1.7). The range of estimates for each type of stimulus indicated that, really, no one could predict with any certainty the likely impact of various proposed new spending or tax cuts.

Eventually, on February 17, 2009, Obama signed a stimulus package that totaled $787 billion: about one-third tax cuts and one-third aid (for states, the unemployed, and for access to health care). Of the rest, labor, health, and education got 8%, infrastructure about 7%, and some was earmarked for energy and water. For line-by-line details with amounts—including items such as a $3.2 billion tax credit for GM, $1.3 billion to “invest in air transportation,” and $2.3 billion to improve Department of Defense facilities related to the quality of life—see Exhibit 8.

As renowned conservative economist Robert Barro of Harvard argued, the Obama administration hoped that the multiplier associated with this package would be greater than one, perhaps as high as 1.5; he noted that a multiplier of one would imply that when increasing spending, the government was not crowding out private investment but was only using slack resources—unemployed labor and capital. Barro instead anticipated that the multiplier was more likely to be far less than one and that any increase in government spending would be at least partially offset by some reduction in private spending.5 The U.S. public could only hope the administration was correct on this one, but people worried that Barro might be right. Whichever side was correct, the stimulus would do nothing to lessen the U.S. debt burden (Figure 2).

4 “Can the Centrists Hold?” Economist, February 5, 2009 (print edition). 5 In 1974, Barro popularized the term Ricardian equivalence, named for the British economist David

Ricardo. See any intermediate macroeconomics textbook for details. Briefly, according to the Ricardian view, consumers are forward-looking and spend based on current and expected future income. If, for example, consumers expect the new stimulus plan to increase their future tax liability, they might save now in anticipation of a higher future tax bill. See also Barro’s “Voodoo Multipliers,” Economists’ Voice 6, no. 2 (February 2009), http://www.bepress.com/ev/vol6/iss2/art5. D

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Figure 2. U.S. debt by type of borrower (as a percentage of GDP).

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Households Business Govt Financial

Data source: Author calculations based on data from Federal Reserve’s Flow of Funds Accounts.

Of course, the current crisis was global, and sizable fiscal deficits were emerging all over

the world, as Figure 3 from the IMF’s January 2009 update of the WEO indicates.6

Figure 3. General government fiscal balances (as a percentage of GDP).

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Emerging and developing economies

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Data source: IMF staff estimates.

6 Figure 3 is adapted from Figure 6 in http://www.imf.org/external/pubs/ft/weo/2009/update/01/index.htm. D o

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Treasury policy: TARP

The first incarnation of the Treasury’s Troubled Asset Relief Program (TARP), signed by Congress in early October 2008, was a $700 billion “bazooka” to bail out the U.S. financial sector. The original idea behind TARP—to free banks and other financial firms of the most toxic loans and securities on their books by purchasing them in auctions—never got off the ground. The hope was that a big buyer (the government) would end up paying more than the prevailing fire-sale prices but less than the intrinsic value if held to maturity (so that these would actually be good investments for the U.S. taxpayer). Instead, with the crisis deepening, on November 12, the Treasury buried the original idea and moved toward deploying TARP funds to recapitalize banks and nonbank financial institutions (such as the financing arms of the big car companies). By the end of 2008, the government had committed $244 billion of public money not to troubled assets, but to troubled financial institutions. This included $40 billion to buy shares in AIG, the single largest injection of capital ever by a government, and $125 billion to banks such as Citigroup, Wells Fargo, and JPMorgan Chase.

On February 10, 2009, Geithner announced the revamped TARP. As the Economist reported, the response was less than positive:7

Most disappointment was directed at the sketchy plan to tackle banks’ toxic assets, such as mortgage-backed securities and leveraged loans. At a late stage Mr. Geithner rejected the idea of a government-run bad bank (as well as blanket guarantees for noxious assets), put off by the high upfront cost and the problems it would have valuing the debt. He now hopes to amass $1 trillion of buying power by drawing in investors, such as private-equity groups, whose inclusion would stretch the government’s money further and bring more discipline to pricing. [B]ut Mr. Geithner still has a yawning gap to bridge between banks, which do not want to sell at depressed prices because of losses they would have to recognize, and potential buyers, who need to be sure of healthy returns. It was this that put paid to both the original TARP and Mr. Paulson’s efforts to rescue structured- investment vehicles. Distressed-debt investors, such as Blackstone and BlackRock, are interested but want more information. To be sure of attracting them, the government might need to provide a combination of cheap loans and a guaranteed floor on losses. But even then, the mooted public-private partnership may not be big enough. Barclays Capital counts $2 trillion–3 trillion of troubled assets in America, excluding prime mortgages, which are souring fast.

Goldman Sachs appeared to agree with Barclays on this. Goldman reportedly estimated

that the United States had troubled assets that amounted to about 40% of GDP. In the depth of Japan’s lost decade, troubled assets (in the form of nonperforming loans) totaled 35% of GDP. Moreover, the Japanese experience was a lesson in the cost of delaying dealing with troubled banks; the fiscal cost of Japan’s bailout of its financial sector totaled almost one-quarter of GDP.

7 See “Dashed Expectations,” Economist (February 12, 2009), D o

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In contrast, the U.S. savings and loans bailout of the late 1980s—in which a government entity (Resolution Trust Corporation) forced the closure of troubled banks, took on their bad assets, and in bankruptcy proceedings recouped much money on behalf of depositors—cost 3.7% of GDP (Table 1).

Table 1. Fiscal cost of financial sector bailouts.

Country Start of Crisis Fiscal Cost (% of GDP)

United States 1988 3.7 Finland 1991 12.8 Sweden 1991 3.6 Mexico 1994 19.3 Japan 1997 24.0 South Korea 1997 31.2 United States 2007 5.8*

* As of September 2008. Data sources: Luc Laeven and the Economist.

Federal Reserve policy

Fed policy during this crisis had been nonstandard, uncommon, aggressive, scary—pick

your favorite descriptor. In the old days, prior to the onset of this crisis, there were three tools available for monetary policy:

 Open market operations. The Fed’s principal tool for implementing monetary policy was the use of open market operations (OMOs)—purchases and sales of U.S. Treasury and federal agency securities. With OMOs, the FOMC specifies the short-term objective, which can be a desired quantity of reserves (as was common prior to the 1980s) or a desired price (the federal funds rate, the interest rate at which depository institutions lend balances at the Fed to other depository institutions overnight). In the early 1980s, Paul Volcker’s Fed moved the focus from a quantity objective (reserves) toward a price objective (attaining a specified level of the federal funds rate).8

8 Another change is increased transparency. Market participants had to divine Fed policy until 1994, when the

FOMC began announcing changes in its policy stance; in 1995, the FOMC began to explicitly state its target level for the federal funds rate. Transparency increased even more in February 2000, when the statement issued by the FOMC shortly after each of its meetings began to include the committee’s assessment of the risks to the attainment of its long-run goals of price stability and sustainable economic growth. D

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 Discount rate. The Fed could also adjust the discount rate, the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve bank’s lending facility (the discount window).9

 Reserve requirements. The third traditional policy tool was the level of reserve requirements, the amount of funds that a depository institution must hold in reserve (in the form of vault cash or deposits with Federal Reserve banks) against specified deposit liabilities.10

On these traditional tools of monetary policy, the Fed had gone about as far as it could

go. In December, the Fed set a range of 0 to 25 basis points for the target federal funds rate (Exhibit 2). On that dimension, monetary policy was as loose as it could be. But Bernanke— derisively called Helicopter Ben for suggesting during the deflation scare of 2002–03 that to stay clear of deflation he could just drop money from a helicopter—had known full well that there were other, nonstandard tools that were permissible by the Federal Reserve Act’s Section 13(3).11 In addition to the traditional tools, the Fed had employed three other types of tools to improve the functioning of credit markets. The first of these three new tools was in the spirit of the Fed’s traditional role of providing short-term liquidity to financial institutions:

 Short-term liquidity facilities for U.S. banks and currency swap facilities for foreign central banks. During the course of the crisis, the Fed had created a number of new facilities for auctioning short-term credit. Ensuring that financial institutions had adequate access to liquidity was thought likely to increase their willingness to extend credit and to help ease conditions in interbank lending markets, thereby reducing the overall cost of capital to banks. To ease conditions in dollar-funding global interbank markets, the Fed also approved bilateral currency liquidity agreements with 14 foreign

9 The Federal Reserve banks offered to depository institutions three discount window credit programs—the

primary, secondary, and seasonal—each with its own interest rate and each fully secured. The primary credit program is for banks that are in sound financial condition; the loans in this program are very short term (usually overnight), and the rate is set above the usual level of short-term market interest rates. (Because primary credit is the Fed’s main discount window program, the Fed at times uses the term discount rate to mean the primary credit rate.) Banks not eligible for primary credit may apply for secondary credit, the (unwritten) assumption being that they must meet temporary liquidity needs or resolve severe financial difficulties; the rate is above that of primary credit. The third type, seasonal credit, is for small banks with seasonal fluctuations in funding needs, such as banks in agricultural or seasonal resort communities; the rate is an average of selected market rates.

10 Note that in October 2008, the Federal Reserve banks began to pay interest on required reserve balances (balances held at Reserve banks to satisfy reserve requirements) and on excess balances (balances held in excess of required reserve balances and contractual clearing balances). There are two implications of this new policy tool: first, the interest rate paid on required reserve balances should eliminate the implicit tax that reserve requirements used to impose on depository institutions; second, the interest rate paid on excess balances gives the Fed an additional tool for the conduct of monetary policy, because it should help to establish a lower bound on the federal funds rate by lessening the incentive for institutions to trade balances in the market at rates much below the rate paid on excess balances.

11 Section 13(3) of the Federal Reserve Act permits the board, in unusual and exigent circumstances, to authorize Federal Reserve banks to extend credit to individuals, partnerships, and corporations that are unable to obtain adequate credit accommodations. D

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central banks. With these currency swap facilities, foreign central banks could acquire dollars from the Fed that could then be lent to financial institutions in their jurisdictions.

Liquidity facilities provided financial intermediaries with ample access to central bank

liquidity but did not alleviate their concerns about capital, asset quality, and credit risk, concerns that may limit their willingness to extend credit. Moreover, providing liquidity to financial institutions did not directly address instability or declining credit availability in critical nonbank markets, such as the commercial paper market or the market for asset-backed securities. To address these issues, the Fed developed a second set of policy tools that involved the provision of liquidity directly to borrowers and investors in key credit markets.

 Facilities for commercial paper market, money market mutual funds, and ABS market. Facilities were introduced to purchase highly rated commercial paper at a term of three months and to provide backup liquidity for money market mutual funds. In addition, the Fed and the Treasury jointly announced a facility—expected to be operational shortly— that would lend against AAA-rated asset-backed securities (ABS) collateralized by recently originated student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration. Unlike other Fed lending programs, this facility combined Federal Reserve liquidity with capital provided by the Treasury. If the program worked as planned, it would help to restart activity in these key securitization markets and lead to lower borrowing rates and improved access in the markets for consumer and small business credit. The basic framework could also be expanded to accommodate higher volumes as well as additional classes of securities, as circumstances warranted.

The Fed’s third set of policy tools for supporting the functioning of credit markets

involved the purchase of longer-term securities for the Fed’s portfolio.

 Purchases of longer-term securities. The Fed had plans to purchase by midyear up to $100 billion of the debt of government-sponsored enterprises (GSEs), including Fannie Mae, Freddie Mac, and the Federal Home Loan banks, and up to $500 billion in agency- guaranteed mortgage-backed securities (MBS). The objective of these purchases is to lower mortgage rates, thereby supporting housing activity and the broader economy.

In Bernanke’s view, most of the new policy tools exposed the Fed to only minimal credit

risk.12 The loans made to financial institutions were generally short-term, overcollateralized, and made with recourse to the borrowing firm. With the currency swaps, it was the foreign central banks, not the financial institutions, that ultimately received the funds and were responsible for

12 Information on Bernanke’s view on the likely credit risk of the various facilities, as well as what he considered evidence of a relaxation of credit strains, were in two speeches: his February 10, 2009, testimony before the Committee on Financial Services, U.S. House of Representatives, “Federal Reserve Programs to Strengthen Credit Markets and the Economy” (Washington, D.C.), http://www.federalreserve.gov/newsevents/testimony/bernanke20090210a.htm, and his January 13, 2009, speech at the London School of Economics, “The Crisis and the Policy Response at the Stamp Lecture” (London, England), http://www.federalreserve.gov/newsevents/speech/bernanke20090113a.htm. D

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repaying the Federal Reserve (and at the time of the swap the Fed received an equivalent amount of foreign currency in exchange for the dollars it provided foreign central banks). Also, the special lending programs to support the commercial paper market, money market mutual funds, and ABS markets had been set up to minimize credit risk to the Fed. The largest program, the commercial paper funding facility, accepted only the most highly rated paper and charged borrowers a premium that was set aside against possible losses. And the facility that would lend against securities backed by consumer and small-business loans was a joint Federal Reserve- Treasury program; capital provided by the Treasury from the TARP would help insulate the Fed from credit losses (and the Treasury would receive most of the upside from these loans). The third new tool—purchasing debt issued by or guaranteed by GSEs—was risky only to the extent that the U.S. Treasury was a credit risk.

One result of the implementation of this new arsenal was a massive and unprecedented expansion of the Fed’s balance sheet. The monetary base (i.e., the amount of Fed assets) used to grow slowly and steadily at about 5% to 10% per year (Exhibit 7); the blips stemming from Fed activities surrounding Y2K and 9/11 were the only noticeable departures from this slow, steady, exceedingly boring expansion of the Fed’s balance sheet. But those days were long gone; the Fed’s balance sheet increased by 100% over the previous year.13

Bernanke knew that the Fed would have to carefully and continuously assess the effectiveness of its credit-related tools. He and Geithner hoped the new tools would relax the severe liquidity strains experienced by many firms and improve interbank lending markets. For evidence, he would look to movements in LIBOR; liquidity pressures; stabilization of the commercial paper market (a lowering of rates and lengthening of maturities so that firms can access financing at terms longer than a few days); stabilization of the money market mutual fund industry, with a cessation of the sharp withdrawals and maybe even modest inflows; and a lowering of conforming mortgage rates.

Ongoing Fed evaluation of existing and prospective programs would center on three

questions. First, had normal functioning in the credit market in question been severely disrupted by the crisis? Second, did the Fed have tools that were likely to lead to significant improvement in function and credit availability in that market, and were the Fed’s tools the most effective methods, either alone or in combination with those of other agencies, to address the disruption? And third, did improved conditions in a particular market have the potential to make a significant difference for the overall economy? For example, in Bernanke’s opinion, the purchases of agency debt and MBS met all three criteria: The mortgage market was significantly impaired, the Fed’s authority to purchase agency securities gave it a straightforward tool to try to reduce the extent of that impairment, and the health of the housing market bore directly and importantly on the performance of the broader economy.

13 For details on the composition and maturity structure of the Fed’s balance sheet as of mid-February 2009, see

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The Fed was also considering outright purchases of Treasury debt, which would in effect (at least partially) monetize the colossal $787 billion American Recovery and Reinvestment Act and, potentially, future stimulus packages. Almost every Latin American country knew that monetizing government debt, if continued too long, could lead to hyperinflation, but in February 2009, Bernanke was not concerned about hyperinflation—inflation, only six months earlier a serious concern, had been falling sharply along with plummeting oil prices (Exhibit 9). Bernanke knew that one way to think about what had been going on in the credit markets was that there had been a huge increase in money demand. While that might have sounded good, it was in fact quite scary as people and firms switched out of all other assets and moved into liquid cash. Bernanke saw it as his job to try and work against that effect. His planned response required a new term to describe current Fed policy, credit easing, which was similar to, but different from, Japan’s policy of quantitative easing.

The international situation Geithner and Bernanke, while considering their options, saw the international situation as

mixed. While the U.S. current account deficit (Exhibits 10 and 11) was narrowing, it was hard for them to imagine that external demand would contribute much to U.S. economic growth going forward. With global economic activity plummeting, who would buy U.S. goods? Moreover, the United States continued to receive substantial international capital flows in 2008 (Exhibit 10), and the dollar surged late in 2008 (which, of course, would make U.S. goods more expensive abroad). Finally, as U.S. savings rates had declined precipitously (Exhibit 11), Geithner and Bernanke had to worry about whether foreigners would continue to lend to U.S. households, corporations, and the government.

The decision

In mid-February 2009, Geithner, a former undersecretary at the Treasury during the Asian Financial Crisis, and Bernanke, a leading scholar on the Great Depression, had a lot on their plates. Their tasks could be stated in deceptively simple terms: What could they, as shepherds of U.S. monetary and fiscal policy, do to halt this epic slide? Were they currently doing enough? Were they doing too much?

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Exhibit 2

GEITHNER AND BERNANKE AMID THE GLOBAL FINANCIAL CRISIS

Financial Indicators (monthly through January 2009)1

Standar d & Poor 's 500 Composite Stock Pr ice Index 1941-43=10

Real Br oad Tr ade-Weighted Exchange Value of the US$ Mar -73=100

0807060504030201009998 Sour ces: Wall Str eet Jour nal , Feder al Reser ve Boar d /Haver Analytics

1600

1400

1200

1000

800

115

110

105

100

The broad dollar index is a weighted average of the foreign exchange values of the U.S. dollar against the currencies of major U.S. trading partners. The index weights are derived from U.S. export shares and from U.S. and foreign import shares. In 2008, the largest weights are euro area (17%), China (16), Canada (15), Mexico (10), Japan (9), and other emerging Asia (15).

Feder al Funds [effective] Rate % p. a.

10-Year Tr easur y Note Yield at Constant Matur ity % p. a.

0807060504030201009998

Sour ce: Feder al Reser ve Boar d /Haver Analyti cs

1 Throughout exhibits, the thicker line corresponds to the variable that is listed first. D o

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Exhibit 3a

GEITHNER AND BERNANKE AMID THE GLOBAL FINANCIAL CRISIS

Growth and Employment (GDP Data through 2008 Q4; Employment through January 2009)

Real Gr oss Domestic Pr oduct

% Change - Year to Year SAAR, Bi l . Chn. 2000$

0500959085807570

Sour ce: Bur eau of Economi c Anal ysi s /Haver Anal yti cs

10. 0

7. 5

5. 0

2. 5

0. 0

-2. 5

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10. 0

7. 5

5. 0

2. 5

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-2. 5

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Change in Nonfar m Employment

SA, Thous

0500959085807570

Sour ce: Bur eau of L abor Stati sti cs /Haver Anal yti cs

1200

800

400

-400

-800

1200

800

400

-400

-800

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Exhibit 3b

GEITHNER AND BERNANKE AMID THE GLOBAL FINANCIAL CRISIS

Contributions to Quarterly Real GDP Growth (data through 2008 Q4)1

Govt Spending

Net Expor ts

08070605040302010099

Sour ce: Bur eau of Economi c Anal ysi s /Haver Anal yti cs

-1

-2

-1

-2

Consumption

Gr oss Pr ivate Domestic Investment

08070605040302010099

Sour ce: Bur eau of Economi c Anal ysi s /Haver Anal yti cs

-2

-4

-2

-4

1 These graphs show the contribution to quarterly (at annualized rates) real GDP growth. The last data point for

each graph indicates that government spending (thick line) is contributing positively to real GDP growth, net exports currently have roughly no effect, and consumption (thick line) and investment are drags on GDP growth. D

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Exhibit 3c

GEITHNER AND BERNANKE AMID THE GLOBAL FINANCIAL CRISIS

Measures of Consumer and Firm Confidence (data through January 2009)1

Univer sity of Michigan: Consumer Sentiment

NSA, Q1-66=100

080706050403020100999897969594 Sour ce: Uni ver sity of Michigan /Haver Analytics

120

100

120

100

ISM Mfg: PMI Composite Index

SA, 50+ = Econ Expand

080706050403020100999897969594

Sour ce: Institute for Supply Management /Haver Analytics

67. 5

60. 0

52. 5

45. 0

37. 5

30. 0

67. 5

60. 0

52. 5

45. 0

37. 5

30. 0

1 The manufacturing ISM Report on Business is based on data compiled from purchasing and supply executives

nationwide. An index above 50 indicates an increase in manufacturing activity; an index below 50 indicates a decrease in manufacturing activity. D

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Exhibit 4

GEITHNER AND BERNANKE AMID THE GLOBAL FINANCIAL CRISIS

The Housing Sector

S&P/Case-Shiller Home Pr ice Index: Composite 20

SA, Jan-00= 100

08070605040302010099

Sour ce: S&P, Fi ser v, and Macr oMar kets L L C /Haver Anal yti cs

220

200

180

160

140

120

100

220

200

180

160

140

120

100

New Pvt Housing Units Author ized by Building Per mit

SAAR , Thous. Uni ts

0500959085807570

Sour ce: Census Bur eau /Haver Anal yti cs

2500

2000

1500

1000

500

2500

2000

1500

1000

500

Data are monthly through November (prices) or December (permits) 2008. D

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Exhibit 5

GEITHNER AND BERNANKE AMID THE GLOBAL FINANCIAL CRISIS

Measures of Financial Market Strains (through January 2009)

The TED spread

(three-month Eurodollar rate minus three-month Treasury bill rate).

080706050403020100999897969594

Sour ce: Haver Anal yti cs

The Baa–Aaa spread (corporate bond Baa rate minus corporate bond Aaa rate).

05009590858075706560555045403530

Sour ce: Haver Anal yti cs

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Exhibit 6

GEITHNER AND BERNANKE AMID THE GLOBAL FINANCIAL CRISIS

FX COMMENT: U.S. Treasury’s TICS Report November 18, 2008 (3:30 p.m. EST)

The US Treasury released its monthly capital-flow data this morning, indicating that net (long-term) portfolio investment into the United States unexpectedly rose 66.2B USD in September from a revised 21.0B USD in August, on expectations of 27.2B USD. Foreigners bought a net 15.8B USD in U.S. Treasury bonds, bought a net 14.8B USD in U.S. agency bonds, sold a net −6.4B USD in US corporate bonds, and bought a net 11.5B USD in US equities. At the same time, U.S. investors sold a net - 37.8B USD in foreign bonds and bought a net 2.4B USD in foreign equities. When considering also short-term flows (such as bank deposits), total (short- and long-term) net capital inflows similarly surprised by surging to 143.4B USD in September, much greater than consensus expectations of - 10.0B USD and +21.4B USD in August.

Three developments within the capital flows data led to the better than expected results. First, U.S. investors were net sellers of foreign stock and bonds for the third consecutive month, totaling a record - 35.4B USD in September, compared to −22.5B USD in August and −34.2B USD in July. This wholesale repatriation of foreign investment was an unambiguous USD positive in September. Second, foreign investment in U.S. bonds surged in September led by an unexpected return of interest in U.S. agency bonds, which had seen a sharp outflow during the prior two months in the wake of the GSE crisis. Foreign investors were net buyers of 19.3B USD in U.S. bonds (Treasury, agency and corporate) during September from −0.6B USD in August and −10.0B USD in July. This was also a positive development for the USD. The third notable development in today’s report was the unexpected net buying of U.S. deposits and short-dated securities on behalf of foreigners during September. The 77.2B USD net buying of USD deposits and short-dated securities in September compares to a revised 0.4B USD in August and −43.5B USD in July. This also was a USD positive and suggests that foreign liquidation of USD- denominated deposits has eased substantially despite the onset of the credit freeze.

The takeaway from today’s report is that there appears to be ample foreign investment to keep the greenback supported amid the most turbulent financial conditions ever seen. Perhaps this is the strongest argument yet for why the USD’s role in the global monetary system should not be changed. Discussion of a Bretton Woods II appears to be premature if not pure hyperbole with respect to a new currency alignment. Love it or leave it, the strong dollar mantra sets the United States apart from all other major economies. Without the backing of a hard asset like gold, the world’s primary reserve currency must be strong, even if at times this means in name only. Michael Woolfolk Senior Currency Strategist The Bank of New York Mellon New York, NY

Note: For the data Woolfolk is referring to, see http://www.treas.gov/press/releases/hp1278.htm. Reprinted with Michael Woolfolk’s permission. D

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Exhibit 7

GEITHNER AND BERNANKE AMID THE GLOBAL FINANCIAL CRISIS

The Money Creation Process (through January 2009)

The Monetar y Base

SA, Mi l. $

0807060504030201009998

Sour ce: Feder al Reser ve Boar d /Haver Anal yti cs

1750000

1500000

1250000

1000000

750000

500000

250000

1750000

1500000

1250000

1000000

750000

500000

250000

The Money Multiplier

M2 / Monetar y Base

0500959085807570

Sour ce: Haver Anal yti cs

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Exhibit 8

GEITHNER AND BERNANKE AMID THE GLOBAL FINANCIAL CRISIS

Details on the $787 billion February 2009 stimulus package

The $787 billion stimulus package is about one-third tax cuts, one-third aid (for states, the unemployed, and for access to health care), and one-third other stuff (labor, health, and education—8%; infrastructure spending—about 7%; energy and water get a bit; etc.). For gorier details, see the list below, adapted from the New York Times’ http://projects.nytimes.com/44th_president/stimulus, where more even more complete details are provided.

Tax Cuts for Individuals (New tax credit for workers) $116.2 billion; Health/Aid to States (Help states with Medicaid costs) $87.1 billion; Tax Cuts for Individuals (Extend patch for the alternative minimum tax) $69.8 billion; Education and Job Training/Aid to States (Help states prevent cuts to essential services like education) $53.6 billion; Unemployment (Extend and increase unemployment compensation) $35.8 billion; Transportation (Provide money for highways and bridges) $27.5 billion; Health/Unemployment (Health coverage under Cobra) $25.1 billion; Aid to Individuals (Increase food assistance) $20.9 billion; Health (Incentives to Medicaid and Medicare providers to adopt health information technology) $17.2 billion; Education and Job Training/Aid to Individuals (Increase the maximum Pell Grant by $500, from $4,850 to $5,350) $15.6 billion; Tax Cuts for Individuals (Expand eligibility for Child Tax Credit) $14.8 billion; Aid to Individuals (Provide cash payment to seniors, disabled veterans and other needy individuals) $14.4 billion; Tax Cuts for Businesses/Energy (Expand tax incentives for renewable energy facilities) $14.0 billion; Education and Job Training/Tax Cuts for Individuals (Expand higher education tax credits) $13.9 billion; Education and Job Training (Provide additional money to schools serving low- income children) $13.0 billion; Education and Job Training (Provide additional money for special education) $12.2 billion; Energy (Modernize the electric grid) $11.0 billion; Aid to States/Education and Job Training (Create new bonds for improvements in public education) $10.9 billion; Health/Science and Research (Provide additional financing to the National Institutes of Health for research and infrastructure) $10.0 billion; Transportation (Invest in rail transportation) $9.3 billion; Transportation (Invest in public transit) $8.4 billion; Housing/ Tax Cuts for Individuals (Incentive for first-time homebuyers) $6.6 billion; Aid to States (Incentives for economic recovery in distressed areas) $6.5 billion; Energy (Provide grants to cities, counties and states to increase energy efficiency) $6.3 billion; Energy (Provide additional financing for Innovative Energy Loan Guarantee program) $6.0 billion; Environment (Clean up sites formerly used by the Defense Department) $6.0 billion; Environment (Finance local water projects) $6.0 billion; Tax Cuts for Businesses (Extension of bonus depreciation) $5.9 billion; Energy/Aid to Individuals (Increase financing for home weatherization program) $5.0 billion; Unemployment (Exempt unemployment compensation) $4.7 billion; Tax Cuts for Individuals (Increase Earned Income Tax Credit) $4.7 billion; Infrastructure (Provide additional money to the Army Corps of Engineers) $4.6 billion; Energy (Increase energy efficiency in federal buildings) $4.5 billion; Infrastructure (Create new program to expand broadband access) $4.5 billion; Aid to States (Create a tax credit bond option for state and local governments) $4.3 billion; Aid to States/Unemployment (Give states aid to properly administer unemployment compensation) $4.2 billion; Infrastructure (Make military facilities more energy efficient) $4.2 billion; Aid to States (Provide additional financing for state and local law enforcement) $4.0 billion; Energy/Infrastructure/Housing (Repair and modernize public housing units) $4.0 billion; Education and Job Training (Finance job training programs) $4.0 billion; Energy (Invest in fossil energy) $3.4 billion; Tax Cuts for Businesses (Expand deduction limits for banks buying bonds) $3.2 billion; Tax Cuts for Businesses (Provide tax break to General Motors) $3.2 billion; Infrastructure (Repair and improve facilities on public lands and parks) $3.1 billion; Science and Research (Provide additional financing for the National Science Foundation) $3.0 billion; Infrastructure (Provide additional money to the Department of Homeland Security) $2.8 billion; Aid to States (Increase block grants for welfare program) $2.7 billion; Energy/Science and Research (Conduct energy efficiency and renewable energy research) $2.5 billion; Infrastructure/ Rural Assistance (Provide additional financing to improve communications in rural areas) $2.5 billion; Housing (Help states and local governments acquire and repair low-income housing) $2.4 billion; Health/ Infrastructure (Improve Defense Department facilities related to the quality of life) $2.3 billion; Education and Job Training (Increase financing for Head Start and Early Head Start) $2.1 billion; Energy/Tax Cuts for Individuals (Increase tax credits for residential energy efficiency improvements) $2.0 billion; Energy/Tax Cuts for Individuals (Incentive for alternative vehicle) $2.0 billion; Health (Provide additional financing for the Office of the National Coordinator for Health Information Technology) $2.0 billion; Housing (Make full-year payments to owners receiving Section 8 housing vouchers) D o

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$2.0 billion; Aid to Individuals (Provide additional child care) $2.0 billion; Energy (Support battery manufacturing) $2.0 billion; Housing (Redevelop abandoned and foreclosed homes) $2.0 billion; Health/ Infrastructure (Finance renovations and technology upgrade at community health centers) $2.0 billion; Energy/Science and Research (Provide additional financing for science and research at the Department of Energy) $2.0 billion; Tax Cuts for Individuals (Incentive for car buyers) $1.7 billion; Tax Cuts for Businesses/Energy (Incentive for advanced energy investment) $1.6 billion; Tax Cuts for Businesses (Delay recognition of certain cancellation of debt income) $1.6 billion; Aid to States/.Unemployment (Expand Trade Adjustment Assistance program) $1.6 billion; Housing (Reduce homelessness) $1.5 billion; Transportation (Invest in local transportation projects) $1.5 billion; Aid to States/Energy (Authorize more state and local bonds for energy-related purposes) $1.4 billion; Environment/ Rural Assistance (Finance rural water and waste facilities) $1.4 billion; Transportation (Invest in air transportation) $1.3 billion; Health (Extend Transitional Medical Assistance program) $1.3 billion; Environment (Finance national environmental cleanup) $1.2 billion; Health/ Infrastructure (Construct and repair veterans' hospitals and cemeteries) $1.2 billion; Science and Research (Compare the effectiveness of medical treatments) $1.1 billion; Health (Prevent cuts to health care providers) $1.0 billion; Environment/ Rural Assistance (Provide water to rural areas and Western areas impacted by drought) $1.0 billion; Health/Science and Research (Make grants to help prevent disease) $1.0 billion; Science and Research (Provide additional financing for the National Aeronautics and Space Administration) $1.0 billion; Other (Modernize Social Security Administration) $1.0 billion; Aid to States (Help states collect child support) $1.0 billion; Housing (Provide additional financing for Community Development Block Grants) $1.0 billion; Other (Provide money for 2010 census) $1.0 billion; Tax Cuts for Businesses (Expand net operating loss carry-back provision for small businesses) $947 million; Science and Research (Provide additional financing for the National Oceanic and Atmospheric Administration) $830 million; Tax Cuts for Businesses (Expand tax break for small business stock sales) $829 million; Education and Job Training (Finance technology upgrades in schools) $650 million; Aid to Individuals (Provide coupon to convert to digital televisions) $650 million; Aid to States (Help states find housing and jobs for disabled people) $640 million; Aid to States (Repeal alternative minimum tax on private activity bonds) $555 million; Aid to Individuals (Help defense employees sell homes) $555 million; Health (Extend Qualified Individual Program) $550 million; Education and Job Training/Aid to States (Help states and local school districts track student data and improve teacher quality) $550 million; Energy/Infrastructure/Housing (Repair and modernize about 4,200 Native American housing units) $510 million; Education and Job Training/Aid to States/Unemployment (Help states find jobs for unemployed workers) $500 million; Education and Job Training/Health (Train primary health care providers, including doctors and nurses) $500 million; Education and Job Training/Energy/Unemployment (Train workers for careers in energy efficiency and renewable energy fields) $500 million; Health (Improve health services to American Indians and Alaska natives) $500 million; Tax Cuts for Businesses (Reduce holding period for taxation of companies that convert into S corporations) $415 million; Energy/Aid to States (Provide grants to states for energy-efficient vehicles and infrastructure) $400 million; Energy/Aid to Individuals (Provide consumers rebates for energy-efficient appliances) $300 million; Energy (Replace older vehicles owned by the federal government with hybrid and electric cars) $300 million; Aid to States (Delay withholding tax on payments) $291 million; Aid to States (Modify speed requirements for use of bonds to finance high-speed rail) $288 million; Tax Cuts for Individuals/Energy (Expand tax incentives for residential renewable energy properties) $268 million; Energy/Housing (Improve energy efficiency in government-subsidized apartment buildings) $250 million; Infrastructure/Other (Finance improvements to Agriculture Department infrastructure) $249 million; Health/Aid to Individuals (Other Medicaid expansions) $239 million; Other (Provide government agencies money for oversight) $233 million; Tax Cuts for Businesses (Provide incentive for hiring disadvantaged workers) $231 million; Tax Cuts for Businesses (Expand use of industrial development bonds) $203 million; Housing/Aid to Individuals/Rural Assistance (Provide loans for rural homeowners) $200 million; Education and Job Training (Provide additional money for College Work-Study program) $200 million; Other (Expand national service program) $200 million; Tax Cuts for Individuals/Transportation (Equalize mass transit and parking benefits) $192 million; Rural Assistance (Provide loans for rural businesses) $150 million; Infrastructure/Rural Assistance/Aid to States (Provide loans for rural developments) $150 million; Tax Cuts for Businesses (Prohibit recollection of tariff payments) $90 million; Aid to Individuals/ Aid to States (Help states provide services to homeless children) $70 million; Aid to States (Allow state housing agencies to claim Treasury Department grants) $69 million; Energy/Tax Cuts for Businesses (Incentive for alternative fuel pumps) $54 million; Tax Cuts for Businesses (Allow more small business deductions) $41 million.

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Exhibit 9

GEITHNER AND BERNANKE AMID THE GLOBAL FINANCIAL CRISIS

Inflation and Oil Prices

CPI Inflation

year -over -year per cent change in CPI

080706050403020100999897969594

Sour ce: Bur eau of Labor Statistics /Haver Analytics

-2

Oil Pr ice: West Texas Inter mediate

Spot, $/Bar r el

080706050403020100999897969594

Sour ce: Wal l Str eet Jour nal /Haver Analyti cs

150

125

100

150

125

100

Monthly data: CPI Inflation is through December 2008. Oil price is through January 2009. D o

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Exhibit 10

GEITHNER AND BERNANKE AMID THE GLOBAL FINANCIAL CRISIS

Balance of Payments ($ billions)

1975–84 1985–94 1995–2004 2005 2006 2007 2008/e

Current Account Balance −14 −98 −331 −729 −788 −731 −705

Trade balance −30 −94 −301 −712 −753 −700 −710 Income balance 27 21 27 72 57 82 123 Current transfers −10 −25 −56 −90 −92 −113 −118

Capital Account Balance 0 −1 −2 −4 −4 −2 −2

Financial Account Balance −3 97 319 701 809 768 594

U.S. direct investment abroad −14 −43 −158 −36 −241 −333 −287 U.S. flows into foreign securities −6 −38 −123 −251 −365 −289 105 U.S. government assets abroad −7 −1 −1 20 8 −22 −492 Foreign direct investment in the U.S. 12 43 150 113 242 238 318 Foreign official flows into the U.S. 11 33 114 259 488 411 554 Private flows into U.S. securities 11 61 309 583 625 731 126 Net banking flows −12 32 12 5 51 44 259

Statistical Discrepancy 17 2 14 32 −47 −41 124

Memo: nominal GDP 2,700 5,588 9,460 12,422 13,178 13,808 14,281

Note: All data, except memo items, are in balance of payments terms. All data are annual averages. 2008 data are estimates that make the (surely incorrect) assumption that Q4 data will the same as Q3 data. Sources: Bureau of Economic Analysis and Haver Analytics.

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This document is authorized for educator review use only by Xiaowen Xu, Other (University not listed) until Oct 2020. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860

UV3957

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Exhibit 11

GEITHNER AND BERNANKE AMID THE GLOBAL FINANCIAL CRISIS

U.S. Savings and External Balance (through 2008)

Per sonal Saving Rate per sonal saving as a % of di sposable per sonal i ncome

Fiscal Savings fi scal bal ance as % of GDP

050095908580

Sour ces: BEA, OMB /Haver

-4

-8

-4

-8

Cur r ent Account Balance

SAAR, % of GDP

050095908580

Sour ce: Bur eau of Economic Anal ysis/Haver Analytics

-2

-4

-6

-8

-2

-4

-6

-8

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