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Inside the Fed's First Financial-Crisis Meeting; Cramer Was Right

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Fisher questioned whether an official statement from the FOMC would be the best action to calm markets, and he asked what it would do to help them rein in "reckless and irresponsible" behavior by creditors.

Geithner said he felt a statement would be the most "powerful" action as he believed it didn't make sense to attempt to persuade banks to lend to unstable institutions.

Fisher relented, agreeing with Geithner that a statement was the "correct thing," but he added that he felt the Fed should receive something in return for providing liquidity.

"I don't agree with that. I don't think that's the way to think about it. This is a general signal that we're prepared to relax or to provide liquidity to help make sure markets come back in some more orderly functioning," Geithner said. "You can't condition that statement without undermining its basic power in some sense."

Fisher again caved and said he didn't want to amend the statement, just that he wanted his mindset to be known.

It was at this moment when Bernanke unloaded.

"My understanding of the market's problem is that price discovery has been inhibited by the illiquidity of the subprime-related assets that are not trading, and nobody knows what they're worth, and so there's a general freeze-up," Bernanke said. "The market is not operating in a normal way. The idea of providing liquidity is essentially to give the market some ability to do the appropriate repricing it needs to do and to begin to operate more normally. So it's a question of market functioning, not a question of bailing anybody out."

The conversation continued as Philadelphia Fed President Charles Plosser, a noted hawk on the FOMC , returned to the question of liquidity. Echoing a sentiment he continues to repeat to this day, Plosser asked in 2007 when it would end.

Dudley offered a simple response: when things settle down and liquidity in markets improves.

Note: The Fed's two current monetary easing programs include $40 billion a month in open-ended, mortgage-backed securities purchases and $45 billion a month in open-ended, longer-term Treasury bond purchases.

"I think there's a lot of suspicion, both in the markets and elsewhere, that the effects of all that easing policy is having kind of diminishing returns," Plosser said in an interview with TheStreet on Jan. 16, 2013. "The benefits, if you will, are not as strong as they were at the height of the crisis."

The meeting then turned to concerns about Europe and whether institutions in the eurozone would be at significant risk of liquidity problems.

Atlanta Fed President Dennis Lockhart asked if there were any "analogs" to Countrywide and Washington Mutual in Europe. The answer to Lockhart's question revealed how unaware Fed members were of the gaping problems that would eventually cripple the U.S. financial system.