10 One important condition for lending in these programs was that the loan needed to be secured to the satisfaction of the Federal Reserve Bank extending the loan. Despite the degree of dislocation in the financial system at the time and the severity of the Great Recession, there were no losses for any of the Fed’s programs. At the same time, I agree with those critics who argue that there was something fundamentally unfair about the disparity in treatment between the few large financial institutions that were saved versus the millions of individuals who lost their homes or their jobs. My response is not particularly satisfying. Recessions inflict considerable pain on innocent bystanders in the economy. Depressions greatly compound this pain. Given the Federal Reserve’s role and authority, what we knew at the time and the powers and tools that were available to us, I think we made good choices. If the large systemic banking organizations had failed, the hardships inflicted on households and small business would have been far worse. 11 From my perspective, I believe that any critique of the Fed or other agencies should be focused more on the regulatory and supervisory shortcomings – some of which, I admit, were ours – that created the economic and financial market circumstances in which the Fed’s extraordinary interventions proved necessary. This leads me back to some of those lessons learned and the changes that have resulted. The crisis showed that the regulatory community did not fully grasp the vulnerability of the financial system.
By locating the duties related to the execution of monetary policy at the New York Fed, the System gains a number of benefits. These include the New York Fed’s ability to develop expertise in and understanding of the broad spectrum of financial markets and institutions, and its access to a deep pool of specialized financial talent in the place where it is most concentrated. The New York Fed’s institutional knowledge and experience in financial markets and its related disciplines are a critical input at all times, but never more so than during periods of duress. This was evidenced during the financial crisis, when the New York Fed’s unique insights and expertise helped the Federal Reserve respond quickly and effectively to unfolding events. The authors who crafted the Federal Reserve Act such as Carter Glass – assisted by H. Parker Willis – deliberately created a central bank structure that fits the U.S. political system, with a series of important checks and balances – between Washington and the rest of the country, between Washington and New York, and with respect to the role of the federal government versus the private sector. These checks and balances exist to ensure that the central bank acts in the broadest interests of the nation, and is appropriately insulated from short-term political pressures and considerations. In this construction, New York does have a special role, but one that stems from where it sits, in New York City, the nation’s most important financial center.