WASHINGTON — When Federal Reserve policy makers convened in August 2007, one of the nation’s largest subprime mortgage lenders had just filed for bankruptcy, and another was struggling to find the money it needed to survive.
Officials decided not to cut interest rates. The Fed did not even mention housing in a statement announcing its decision. The economy was growing, and a transcript of the meeting that the Fed published Friday shows officials were deeply skeptical that problems rooted in housing foreclosures could cause a broader crisis.
“My own bet is the financial market upset is not going to change fundamentally what’s going on in the real economy,’’ William Poole, president of the Federal Reserve Bank of St. Louis, told his colleagues at the meeting.
That was on a Tuesday. By Thursday, the European Central Bank was offering emergency loans to continental banks, the Fed was following suit, and an alarmed Poole had persuaded the board of the St. Louis Fed to support a reduction in the interest rate on such loans. The somnolent Fed was lurching into action.
“The market is not operating in a normal way,’’ the Fed chairman, Ben S. Bernanke, told colleagues on a conference call the next morning.
Bernanke, a former college professor and a student of financial crises, was typically understated as he explained that the Fed was pumping money into the financial system because private investors were fleeing.
“It’s a question of market functioning, not a question of bailing anybody out,’’ he said. ‘‘That’s really where we are right now.’’
More than five years later, the Fed continues to prop up the financial system, and the transcripts of the 2007 meetings, released after a standard five-year delay, provide fresh insight into the decisions made at the outset of its great intervention.
They show that Bernanke and his colleagues continued to wrestle with misgivings about the need for action.
The Fed’s eventual response, which it expanded significantly in 2008 and 2009, is now widely credited with preventing an even more catastrophic financial crisis and a deeper recession.