Federal Reserve policymakers, in a tense meeting on one of the darkest days of the financial crisis, worried Lehman Brothers' failure would wreak havoc on a teetering financial system but feared cutting interest rates might prove an over-reaction.
At a meeting the day after the investment bank filed for bankruptcy, Fed Chairman Ben Bernanke flatly told colleagues he was philosophically torn about how the U.S. central bank should respond, if at all, to the turmoil set off by Lehman's collapse.
The revelation came in transcripts of the Fed's 2008 policy deliberations released on Friday. The 1,865 pages throw light on a debate over whether to loosen monetary policy to battle a crisis that was fast engulfing global financial markets.
In a year that saw the United States and most of the developed world sink deep into a brutal recession whose scars still linger, U.S. central bankers wrestled with how to respond to panicked markets and economic data that sent mixed signals.
At the time, some officials thought the maelstrom would be resolved quickly, and many were wringing their hands over a run-up in inflation and hesitant to come to the aid of the economy.
At the Sept. 16 meeting, Bernanke struggled to weigh the moral hazard of "ad hoc" decisions to help failing banks against the possibility of "very severe consequences for the financial system and, therefore, for the economy of not taking action."
"Frankly, I am decidedly confused and very muddled about this," he said. "I think it is very difficult to make strong, bright lines given that we don't have a structure that has been well communicated and well established for how to deal with these conditions."
In the end, the Fed stood pat. Within a month, however, it had entered full crisis-fighting mode, and by the end of the year it had cut rates to near zero and launched the first of its several controversial bond-buying programs.
On Sept. 16, the day the Fed Board authorized a $85 billion loan to prevent the bankruptcy of insurer American International Group, policymakers were torn: inflation was running high, but signs of economic weakness were everywhere.
People in the tony suburbs across the bay from San Francisco were even deferring cosmetic surgery, joked then San Francisco Fed chief Janet Yellen, who succeeded Bernanke at the Fed's helm earlier this month.
Most of all, officials felt largely unable to gauge the likely fallout so soon after Lehman's bankruptcy, which turned out