Donald Kohn
Donald Kohn

WHEN: Today, Wednesday, September 1st

WHERE: "CNBC Special Report: Rally on the Street"

Following is the unofficial transcript of a CNBC EXCLUSIVE interview with outgoing Fed Vice Chairman Donald Kohn today, Wednesday, September 1st on a "CNBC Special Report: Rally on the Street." Excerpts of the interview will run tonight on CNBC's"The Kudlow Report" at 7:00pm ET and on Thursday, September 2nd throughout CNBC’s Business Day Programming. The full transcript will be available on CNBC.com.

All references must be sourced to CNBC.


STEVE LIESMAN: So, Don, I-- I just have to ask you to start with-- was-- was giving an interview to Liesman. The last thing on your list before you got out of here? Was that--

DONALD KOHN: Actually, it's almost the last thing. There are a few people I want to say goodbye to, after I give you an interview, but you're the last-- real substantive-- substantive task I have on my list.

STEVE LIESMAN: I'll take that as a compliment. So, it's 40 years that you've been in the Federal Reserve system and 30 years-- that you've been at the Federal Reserve Board here?

DONALD KOHN: Well, actually 35 here. I came here in 1975. I started the Kansas City Fed in 1970.

STEVE LIESMAN: So, I want to start off with-- something I read, reasonably humorous, I guess. Allen Greenspan in his book says that you had to tell him how the meeting was run, like the day before the meeting or something like that?

DONALD KOHN: Well, I told him what the procedures were. That's right. So, I was the Secretary of the Open Market Committee at the time. And in charge of the meeting and the materials-- getting the materials to the policy makers. And it's true that I walked through the meeting procedures with Allen-- right before he-- right before he--

STEVE LIESMAN: What did you tell him about how it worked?

DONALD KOHN: Well, I told him how the meeting was basically structured in two parts. Economics part and a policy part. And kind of the role of the chairman and playing a bridge from one part to the other part. So-- and that staff fork-- you know, the staff presentations had…just sort of walked him through the procedures.

STEVE LIESMAN: The-- the Fed has been writing statements since 1994, if I'm not mistaken. Public statement.

DONALD KOHN: That's correct. January '94.

STEVE LIESMAN: January '94. Somebody wrote that you have played a hand in writing every single one.

DONALD KOHN: That's probably true or very close to true, yes.

STEVE LIESMAN: As the head of monetary affairs, if I'm not mistaken, just…understand what you did and what that person does. You would present the blueprint, essentially, that people could choose from the Chinese menu, if you will, of options. For the board. And you would write those out.

DONALD KOHN: That's right. Those-- the options. Now-- from 1990-- so, before 1994, of course, there was no statement associated. From 1994 to approximately 2000, I can't remember when-- there wasn't a statement given out ahead of time to the committee. And-- they were presented with a statement at the meeting. And that statement was in fact a statement that Chairman Greenspan and I had worked on, usually over the weekend, before the meeting.

And then after that, the-- the committee appropriately said, "We-- this statement is getting more and more important. We want a hand in crafting it much more than just getting it presented to us at the last minute." And we started giving the-- statement to the-- the alternative statements that matched up with the Chinese menu of choices to the committee beforehand, asking for their comments.

STEVE LIESMAN: So, you were here when they first started doing and you're here now. What-- what has-- I mean, how do you compare the transparency or what the Fed is doing now, in terms of communicating with the public, with what it did, say, first when you began and then when they first started writing statements in '94.

DONALD KOHN: Well, I think-- we're much more transparent than we were, certainly, when I began in the 1970s. The statements are a key part of it. When the statements started, before the statements, the markets had to kind of guess whether we had changed our federal funds target by the actions of the Federal Reserve Bank of New York in the market. And occasionally, they got it wrong.

There was a very famous incident in-- Friday after Thanksgiving in 1989. In which the desk-- did one thing, the markets interpreted it one way, it was the wrong way, and there was a lot of upset. That was called the Thanks-- the so called Thanksgiving turkey is what it was called by-- inside the Federal Reserve.

After that, I think the desk became much clearer about the signals it was sending. But it still was an inference that the markets had to draw from what the Federal Reserve was doing. Then in February of '94, when we started-- when we got ready to raise interest rates for the first time-- in several years, since I guess 1989-- Chairman Greenspan decided that it was better to let the market know what we were doing pretty explicitly. Not have them guessing at such an important turning point in interest rates. And we put out a statement.

Initial statements were pretty bare bones. Kind of what we did. Maybe a little bit about why we did it. But not much. Over the years, they become-- much more explicit about our views of the economy. How they have evolved. Our views of the inflation picture. How that's evolved. And our-- policy choices and why we're making those policy choices. So, those statements are providing a lot more information.

STEVE LIESMAN: Why-- why be more transparent? What do you get out of that?

DONALD KOHN: I think the better the market understands what we're doing and why we're doing it, the more we're likely to get predictable and constructive responses from the markets. Having them guess and guess wrong is not constructive. Can send things in the wrong direction. So, I think it's in-- in everybody's interest, both the markets and the federal reserves, that it understand what we're doing and why.

I think another important part of the transparency evolution is the minutes. The minutes used to be published after the next meeting. Didn't get much attention. Appropriately. They were old news by then. And I think an important part of increasing transparency and helping the markets and the public understand what we're doing was the earlier publication of the minutes.

Because it can give a much more nuanced view of what was going on, how the discussion went, some of the topics that came up. And didn't result in decisions that were part of the announcement-- the prosecution and cons, as you saw in the minutes that came out yesterday or presented-- presented in them. And I think people have a much better understanding. I was long in favor of speeding up the publication of the minutes, even though when I was Secretary of …was not in my self interest, because it's not easy to do to get all the clearances, get it done very rapidly. But I think that was-- that's been-- that's been an important plus.

STEVE LIESMAN: Is there a danger now of too much transparency?

DONALD KOHN: I think it's hard to have too much transparency. I do think that there is-- can be a tradeoff between transparency and discussion in the committee meetings. So, I think what we don't want is so much transparency or a kind of transparency that any way impinges on the free flow of discussion in the meeting. So, the typical example would be, "Why don't you bring CNBC cameras, Steve, into the F.O.M.C. meeting and--

STEVE LIESMAN: It'd be great to just…put it right there. And-- and-- and televise the meetings? And I think-- that's an extreme example. But it would clearly-- impair constrain-- the type of discussion that-- is at the meeting. So, you want a free flow of ideas. I don't think you want people-- having made up their mind completely before they come into the meeting. I think you want them listening to each other. So-- the transparency I'm thinking of is the transparency that explains why we did what we did and the factors that went into it. Rather than the transparency--

STEVE LIESMAN: What about when, for example, Jim Bullard last-- a couple weeks ago, puts out this big paper that says basically the Fed has to do more on deflation? He came on CNBC. I mean, is that too much transparency? How do you react to that as a board-- as a governor?

DONALD KOHN: I-- I think it's good to have those-- disparate ideas out there. I think a strength of the F.O.M.C. is the diversity of view on the-- on the committee, a strength of the Federal Reserve system is having reserve bank presidents who have their own research departments, who can come up with-- with different and new ideas. So, I thought that having that idea out there was-- I didn't have a problem with having that idea out there. I hope that-- I mean, the problem I think would become if people get confused about sort of where the committee is. And they-- and-- so many ideas-- make the committee stand-- sort of the middle of the committee less easy to understand. But I think the chairman represents the committee. People appropriately pay by far more attention to what Ben Bernanke says than they do to Don Kohn or anybody else on the committee.

STEVE LIESMAN: So, that's-- a good jumping off point. If you're out in the market, listening to all of these guys speak, how would you tell people to listen to the Fed?

DONALD KOHN: So, I would say take account of what you know about these people's positions and where they are on the committee. And-- if you see someone on the committee that you think represents the middle of the committee moving and changing, then that's-- could be quite significant. If you see somebody who is known to have disagreed with the committee over time. And Tom Hanna would be an open and obvious example of that. The fact that he continues to disagree is a news.

And if I were in the market, I wouldn't-- I would pay attention to what Tom says. I have a lot of respect for his views. But I wouldn't mistake that for the F.O.M.C. speaking. And I would still continue to pay most attention to Ben Bernanke.

STEVE LIESMAN: Yeah, you told me, "When in doubt listen to the Chairman."

DONALD KOHN: That's right.

STEVE LIESMAN: Now, go back to your days as a member of the staff, where apparently there was a famous incident where you maybe crossed a line a little bit. What Larry Meyer, I guess, calls in his book "the time to deliver speech." Where--

DONALD KOHN: I don't-- I don't--

STEVE LIESMAN: You don't recall this?


STEVE LIESMAN: Apparently, sometime, I want to say in 1997-- March of '97-- you as a staff member told the F.O.M.C. that you can't continuously promise to raise rates. You must at some point deliver higher rates. And apparently Greenspan turned to the committee and said-- Kohn said we have to deliver. Do you remember that?

DONALD KOHN: I don't remember that.

STEVE LIESMAN: All right. Let me-- let me move on.

DONALD KOHN: As a general point, I was-- I was not making recommendations for the committee.

STEVE LIESMAN: That's why--

DONALD KOHN: And my-- and my presentations to the committee as a staff member, I was trying to be very careful about representing all points of view and trying to present the best perspective from all points of view. And a number of committee members would say to me that they valued that. That I wasn't taking sides in my presentation. They also said from time to time that they thought they could detect where my position was, but I-- I don't know what to do about that.

STEVE LIESMAN: Well, Larry--

DONALD KOHN: Maybe this is one of ....

STEVE LIESMAN: Larry Meyer agrees with you. He said he would-- he would talk to you-- the last person he talked to before he made up his mind. He wouldn't go into a meeting without talking to you first. As several other governors have said. Former governors.

DONALD KOHN: As a staff member, I thought it was-- a privilege, I enjoyed talking to these policymakers. Having them make their arguments to me. Having me reflect their arguments back to them. And-- discuss what they were about to say and how they were thinking. Help them strengthen their arguments. I-- I enjoyed my conversations with Larry and Alan Blinder. And-- Mike Kelly was-- some-- another person I used to talk to before every F.O.M.C. meeting. That was-- that was fun. It was good.

STEVE LIESMAN: What-- when you depart, there's only gonna be four board members. What does that mean for the Federal Reserve?

DONALD KOHN: I think it's very tough for the Federal Reserve. We have a lot to do. Implementing the new-- Dodd/Frank Bill, for example. And-- deciding how to go forward in monetary policy. And four board members is not enough. There are not enough board members. Five is-- wasn't enough. We had five through the crisis.

And that wasn't enough. And I think the Congress designed the Federal Reserve board with seven governors. I think that was a good number of governors. It enables us to share administrative duties more broadly. It brings a diversity of views onto the board. More people to talk to. And-- I hope the Congress-- the Senate acts quickly on those other three nominees.

STEVE LIESMAN: Brought up Dodd/Frank. It's a lot of work, I guess, for the Federal Reserve to do. ... public hearings. Does the existing bill-- you-- hobble the Fed's ability to deal with crises in the future?

DONALD KOHN: I don't think so. But we won't know until we get there. So, I think it gives the authorities more-- more choices. Particularly in the resolution authority. I think we were hobbled in the Bear Stearns, Lehman, AIG situation by not having a variety of failure scenarios we could play out. It was either an on/off switch. Either you kept the firm going more or less as it was, with a lot of liquidity and backup.

In the case of Bear Stearns, selling it to J.P.M. Or you shut it down, as in-- put in the bankruptcy court with Lehman. So, I think the resolution authority will give the-- future-- government authorities a lot more choices between the two extremes. And they'll be able to impose-- major losses on everyone who supplies capital. Not just the equity holders. But the sub debt holders. And some of the other types of capital holders.

They'll be able to make choices as to whether the system is-- safe enough, resilient enough they can actually impose losses on creditors. Under some circumstances, some kinds of creditors. So, I think, from that re-- in that regard, the authorities have a lot more choices. It is true that the Congress has-- restricted the Fed's ability to make single entity loans like Bear Stearns or J.P.M. and Bear Stearns and AIG, but I think the resolution authority substitutes for that. So, I don't think that's-- that's a problem.

STEVE LIESMAN: But hold-- hold it right there. I mean, you guys-- I-- I think sometimes in this room, you did video conferences--

DONALD KOHN: That's correct.

STEVE LIESMAN: --during the-- during the crisis. And you made snap decisions to make snap loans, under the 13-3 emergency and ... circumstance authority.

DONALD KOHN: Snap isn't the word I would use.

STEVE LIESMAN: All right. All right. ...

DONALD KOHN: They're some tough decisions to make.

STEVE LIESMAN: Put it this way. With greater rapidity that-- than which the Fed normally makes decisions.

DONALD KOHN: That's correct.

STEVE LIESMAN: Of such import.

DONALD KOHN: That's correct.

STEVE LIESMAN: But now, do you have that same ability to make those rapid decisions--

DONALD KOHN: Well, I think we have--

STEVE LIESMAN:--on 13-3?

DONALD KOHN: I think we have these authority to open widely available facilities under 13-3. We need the Secretary of the Treasury--

STEVE LIESMAN: To sign it.

DONALD KOHN: --to sign off.


DONALD KOHN: But I think in the circumstances, I would predict that if those facilities are necessary, the Secretary of the Treasury, there'll be a lot of consultation between the Fed and the Treasury ahead of time. While the crisis is ongoing. And I don't think going to the Secretary of the Treasury and getting his approval will be a major-- major barrier.

Now, there are some other restrictions. I actually-- little concerned about the restriction on-- reconstructing the FDIC-- insurance of deposits. They have to go to the Congress to get the Congress to pass-- to pass something, I think, on that. So, the Congress did constrain-- the government-- the governmental authorities to some extent. They felt that we probably went too far. I think we didn't. But they probably did. They put some more barriers and some more decision processes around these decisions. And-- that's fine. I think it'll work out okay.

STEVE LIESMAN: Let's talk a little bit about the crisis itself. And just-- even just before it. I was reading some of your speeches from '05 and '06. And you saw a lot of these issues out there as a member of the board. You saw the issue of too big to fail. A concern about systemic risk. And things-- what-- what I don't understand is why when you and others at the board had an idea of some of these issues, why nothing seemed to have been done about it, ahead of time?

DONALD KOHN: Well, I think-- I think I saw some of the issues, but I certainly will admit that I didn't see the severity. The fatness of the tail and the severity of the reaction.

STEVE LIESMAN: What does that mean? "The fatness of the tail"?

DONALD KOHN: That their-- so-- that there was as big a risk of a major cumulating downturn in the financial marks. Deleveraging process. Illiquidity catching on. Leading ultimately to panic-- for awhile. I didn't foresee that. I thought there were risks. I think we did deal with some of those risks. For example, the Federal Reserve and the other agencies put out guidance on-- non-traditional mortgages. These option arms that ended up being poison to WaMu and-- some of the other lenders.

But it took awhile to get that out there. I think it was-- watered down to some extent in the interagency process. And-- so, perhaps it wasn't as forceful as it could be. But we did get that. And commercial real estate, which has come to be a problem for many banks. We put out guidance to the supervisors in the banks, telling them they needed to have their risk management--

STEVE LIESMAN: Isn't that guidance late?

DONALD KOHN: I think it was late. And-- obviously, with 20/20 hindsight, maybe it should have been earlier. And maybe it should have been tougher. But I don't think it's-- and we put out something for comment. There was a lot of comment. Including a lot of comments from people that told us we were wrong. That we were-- that it was gonna have a terrible adverse effect on community banks, if they weren't allowed to do this commercial real estate lending. A lot of adverse comments, including from the-- a number of Congressmen. So, it took awhile to get it out there. But I think-- it's wrong to say that we didn't see these problems. Obviously, we could have done it faster, stronger. But--

STEVE LIESMAN: So, in-- in the answer to my question about why nothing was done about it, it sounds like you're talking about political pressure on the Fed?

DONALD KOHN: No, I don't--

STEVE LIESMAN: That made it harder for you as a regulator to regulate?

DONALD KOHN: I wouldn't call it political pressure, Steve. I think there is a process among the supervisors and regulators for trying to reach a consensus about what to do. And-- that takes some time. And it's unfortunate. And I think that we will operate all the supervisors and regulators have learned that lesson. And I think where things-- where they see problems, I'm sure they'll reach a consensus faster and get the-- get the guidance out there faster.

STEVE LIESMAN: There was also a series of beliefs that you had and-- inside the Fed more broadly about the market's ability to regulate itself. And-- and aren't I guess what-- in hindsight, I think you've acknowledged this in your May 2010 speech. That a belief the derivatives were making the banking system safer when in fact they were making it weaker or otherwise not spreading risk.

DONALD KOHN: That's right.

STEVE LIESMAN: And-- and I guess the question that comes off of that, Don, is how do you know that regulators, again, won't make the same kind of mistakes?

DONALD KOHN: I don't think we'll make the same kind of mistake, Steve. We'll probably make different mistakes. But-- human nature being what it is. I-- I think we-- obviously, everybody's learned a huge lesson. Including the private sector and the regulators. I think you're-- you're-- you're right. I thought that the risk was better distributed. More diversified. That people that-- banks, financial institutions have made themselves safer.

I didn't recognize the extent to which many of those derivative instruments were in-- conduits and sieves. And came back onto the balance sheets. That the loans were being sliced and diced. And they looked like they were off the balance sheets of the banks. But they came back onto the balance sheets of the banks. I think the lack of transparency in that market was a real problem.

The complex interactions, interrelations were a real problem. The mono line insurers ended up being-- writing a lot of insurance on mortgages. I don't think I recognized that the risk really wasn't as diversified. It looked like it was all come-- gonna come down on a couple of insurance companies. They weren't really prepared for that. I think we've made a lot of steps to take-- taken a lot of steps to take care of some of those issues.

And then the Dodd/Frank bill, for example, the derivatives trading will have to move more and more to exchanges. It'll have to go to central clearing parties. When the central clearing occurs that gives us, as regulators, but also the other participants in the market a much clearer vision into who the counterparties are. And an ability to-- because of the central clearing is the counterparty. An ability to control the risk in that. So, I think-- a number of steps have been made to-- to help in that regard.

STEVE LIESMAN: One-- one official at one of the central banks around the-- one of the district banks around the country said to me, "The problem was that the macro economists took over policy." And not necessarily regulators or bankers were-- were-- were central to the making of policy. Was that a mistake? I mean, that was-- and-- and-- and I've been reading speeches by you and others that say the-- the initial concept was if we get the macro economy right, we will minimize the potential for financial instability to create crisis or-- or to create systemic risk. That idea doesn't really work anymore, does it? That's not really the—the…

DONALD KOHN: Well, obviously, it did-- it didn't work in this case. And in fact, it could be that the macro stability helped to create the crisis. Because it bred a complacency. The great moderation. We went from 1982 through 2006 with two relatively mild recessions. It was an amazing period of growth and prosperity-- in this country. And I think part of what happened in the 2000s, the 2003 through 2007 period is people looked at that and they said, "Gee, those guys have learned to control the business cycle. Every time we've…we had this gigantic crash in the technology stocks. We had problems in the junk bond market in 2002-2003. And yet, the economy is recovering."

So, I think a lot of people thought the economy was a lot more resilient. The risk was-- and therefore, they didn't diversify the risk as well as they should have. So, I think complacency was a big part of it. I don't agree with the statement that you started that somehow the macro economist had taken over supervision and regulation. But I do think all-- all-- altogether the macro situation, the calmness of the macro situation was a major contributor to the-- the fatness of the tail that developed.

STEVE LIESMAN: Have you-- have you changed at all your view that the Fed ought to address bubbles while they're happening? Or only address the other side of it?

DONALD KOHN: I think we ought to address bubbles while they're happening, but I think we should do it with supervision regulation first. But I-- I think-- interest rate is a very blunt tool. If you-- if I see a bubble in the housing market and I raise interest rates to take care of the bubble in the housing market, I discourage capital spending. I discourage spending on automobiles. I discourage exports, because the dollar will go up.

So, the inster-- interest rate has a broad effect across a lot of different markets. The first choice, I think, would be if you see a bubble in the housing market or you suspect unsafe lending practices in the housing market and asset prices being distorted that the supervisors, the regulators go after that problem first. And I think there are also issues that we can look at from a macro prudential. So that the macro prudential perspective is look at the macro economy, the macro credit markets and use those sort of micro-supervisory tools. Capital requirements. Loan to value ratios. As a way of damping problems in the financial sector.

What I rule-- I wouldn't rule out ever using monetary policy if I thought those other things weren't helping. That there was this dangerous imbalance building up in the markets. And-- I tried a lot of other things and that didn't work. Then I think I'd have to look to-- to monetary. But I think keeping monetary policy focused on macro-economic stability and prudential supervisory policy focused on the safety and resilience of the financial system is-- is a very good division of responsibilities.

STEVE LIESMAN: There are some who criticize that very idea, which is initially that we'll deal with the after affects through monetary policy. And that essentially is the put. That's-- that's allegedly out there that if the Fed is going to clean up the mess, then I can really have a great time right now. Do-- are you concerned that that idea of addressing the after effects of the bubble, the inherent promise in that, creates a moral hazard?

DONALD KOHN: I don't think it does, Steve. I think that we ought to be aiming at macro economic stability. Price stability. And reasonably full employment. And we ought to be raising interest rates if increases in asset prices threaten price stability. We ought to be lowering interest rates if decreases in asset prices threaten economic stability and-- and-- price stability.

I don't see that as an asymmetric policy. I think anybody who bet in the tech-- on the technology stocks thinking that lower interest rates were gonna bail them out, lost a hell of a lot of money. Anyone who bet on the housing market, thinking that lower interest rates are gonna bail them out, also lost money. I-- I just don't-- I don't think investors shouldn't think that the Federal Reserve using its monetary policy to promote macro economic stability is going to necessarily mean that asset prices don't fluctuate. Or that declines in asset prices are quickly reversed. That's just not true. It's not true in history. And it won't be true.

And we will continue to have very major swings in asset prices. I think the-- I-- that's just-- I think human nature to get-- carried away in some sense, particularly when there's an innovation. As in the tech market is a good example. So, there was really an increase in productivity, technology was being brought to bare-- in new and innovative ways. And people just got carried away. They thought the profits from that were gonna be much higher than they turned out to be.

They got carried away. And that'll happen again. Absolutely guaranteed. And the-- the key here is to make the financial system resilient to those kinds of changes in asset prices. So, people will lose money, but it won't bring down the banking system, the financial system with it.

STEVE LIESMAN: What about the charge, Don, that it was low interest rates that prompted people to take more risks than they otherwise should have?

DONALD KOHN: I don't agree, Steve. I think-- low interest rates-- probably contributed a little around the edges to the run-up in housing prices. But I think most of the studies I've seen suggest that it was just a little around the edges.

STEVE LIESMAN: But John Taylor just this weekend--


STEVE LIESMAN: -- said if you just followed his rule, you wouldn't have been there.

DONALD KOHN: And I don't agree. So, I think that-- there are various versions of John's rule. As Ben noted in his talk in Atlanta, and as I pointed out in a talk I gave at-- at a symposium in honor of John Taylor. If you look at other measures of inflation-- other measures of output, you can-- get a very reasonable interest rate path. And I think the other-- that you-- you don't see that the Federal Reserve kept interest rates too low for too long on a Taylor rule type path.

I-- I think the other point to make is that a lot of studies suggest that while housing, obviously, is-- sensitive to interest rates, the kind of interest rate declines, and we hard this at Jackson Hole, the kind of interest rate declines that we saw in that 2004, 2003-4 period, weren't enough to explain but a small fraction of the increase in housing prices.

STEVE LIESMAN: Don, were there decisions taken during the crisis with which you disagreed?

DONALD KOHN: No, Steve, actually there weren't. There were some very, very tough, difficult decisions. We spent a lot of time trying to figure out what was wrong and how to address what was wrong. Liquidity issues. Eventually capital and solvency issues. But-- I-- I can't recall a decision that the Federal Reserve took during the crisis that I-- that I-- that I genuinely felt was the wrong decision.

STEVE LIESMAN: You-- you are known as a person who cares deeply about the reputation of the organization. Were there decisions made-- taken that you-- thought threatened the credibility and the reputation of-- of-- of the-- Federal Reserve?

DONALD KOHN: I recognized that some of the decisions that we were taking would be unpopular. That we would be seen as favoring some institutions in favor of others, that sort of thing. But I-- thought that the reputation of the institution, ultimately, in the eyes of historians, would-- depend on how correctly and aggressively we fought against a very serious, deteriorating situation.

And I was willing to trade off some short run issues for what I thought was doing the right thing over the long run. And I-- and my mind actually made that tradeoff, so I'm not-- this is not something I'm making up afterwards. I thought about this as we were going through. I knew that some of the things we were doing wouldn't be popular. That we would be attacked.

Most of the time for being too aggressive, right? So, for lowering interest rates too fast. For lending. Opening up the primary dealer credit facilities. For helping Bear Stearns. So, most of the criticisms all along was for being too aggressive rather than not aggressive enough.

STEVE LIESMAN: A couple times, though, it was the other way around, though. Jim Kramer famously ranted that you had no idea what was going on. And in retrospect that doesn't seem like it was-- not that you had no idea what was going on, but that you were not responding to what was going on. That didn't seem so out of whack in-- in retrospect. I understand there was a meeting where you all decided-- I guess this is from David Wessel's book that you were quote unquote "behind the curve." There were points in time

DONALD KOHN: I-- I'm not sure exactly what meeting that was in reference to, but it might have been January of '08.

STEVE LIESMAN: Yes, exactly.

DONALD KOHN: And-- and-- so, if we were behind the curve, it wasn't by much. And we did 125 basis points.

STEVE LIESMAN: In two weeks.

DONALD KOHN: In two weeks So, I think we got ahead of the curve there. I was worried, going into that period. I could see the situation was deteriorating as we got into December. And-- was deteriorating in two respects. One that the financial-- the pressure on financial institutions was mounting up. There were more financial institutions having more problems. But secondly that the economy was beginning to slide downhill. And in retrospect, the-- the B.R. does mark December as the-- beginning of the recession.

So, I was worried in January about whether we were getting behind the curve. And I argued pretty strenuously in early January that we should be doing something. So, I welcomed that-- very aggressive move-- over two weeks in January. So, I-- we weren't behind the curve for long.

STEVE LIESMAN: Are you concerned that the reputation of the Federal Reserve has suffered a permanent-- has suffered permanent damage because of the actions that were taken during the crisis?

DONALD KOHN: I certainly have been concerned with the-- how widespread the attacks on the Federal Reserve were, particularly a little while ago. I think that-- and they were coming from lots of different directions. There was a populist direction. "Why are you bailing out the banks?" There was kind of a monetarist direction. "You're putting all these reserves and you're building in inflation, into the system. How can you possibly think you could raise the monetary base that quickly without having some terrible consequence?"

"You're losing your independence from the Treasury." So, I-- I didn't worry when those-- when the attacks were coming from people who often attack us. I did worry when those attacks seemed to be migrating to the middle of the political spectrum, becoming more widespread. I-- my sense is that as time has gone on, the decisions we've made look better and better and better. So, the people who said, "Why are you making those loans? You're taking a lot of toxic assets onto your balance sheet?"

Well, all those loans have been paid off, except for those three maiden lanes to those particular institutions and our view is they will be paid off, as well. So, I think-- the people who said, "You're creating a lot of inflation with all these reserves." Inflation's gone the other way. I think it's time-- as I thought, I mean, we-- in response to your previous question about short run versus long run, as I expected, as we were making these decisions, the further in time we get from the decisions, the more correct they look.

They've played out as we thought they would play out. We were able to shut all those liquidity facilities. Market liquidity did return, has returned in many-- in many respects. So, I think we look better and better. And my sense is that the attacks on the Federal Reserve have receded to some ext-- to some extent. And the fact that we came out of the Dodd/Frank Bill with enhanced authority in some respects, as compared to what some of the proposals were just six, seven, eight months before, I think-- a test to the fact that as people stepped back and took a look and thought about what they were saying and what we did, that we look better.

STEVE LIESMAN: So, how would you say history will judge how you and the Federal Reserve acted during this period?

DONALD KOHN: I think they'll judge it will. I think given the-- given what we knew, the tools we had, I think we did-- as well as anybody could have done.

STEVE LIESMAN: In-- in doing what? I mean--

DONALD KOHN: In creating liquidity facilities. In lowering interest rates. In working with the other regulators on the stress tests.

STEVE LIESMAN: That you-- that you saved the economy from far worse? Is that what you—you…ought to judge?

DONALD KOHN: I certainly think that if we hadn't acted as aggressively as we did, it would have been far worse.

STEVE LIESMAN: You have now spent some 40 years in this system. What-- what-- would you like your legacy to be to central banking? And to the economy?

DONALD KOHN: I'm not sure, Steve. I don't think about legacies, to tell the truth. I do think as a policymaker, I've tried to-- be pragmatic but disciplined. Disciplined in the sense of using economics to analyze situation, bringing empirical data to bear, so that I-- I can-- adjust my analysis as the data-- as the data come in.

I tried to act in a collaborative way with my colleagues. I would say in terms of legacy, one thing that surprised and pleased me is the number of people who have come up to me since I announced my retirement in the Federal Reserve, but also in other central banks. And said that to one extent or another I had been a model for them. That my behavior-- my analytic approach, my collaborative approach had-- my-- pursuit of-- the public interest had helped them model how they were behaving. I never did that on purpose. But it's been very gratifying. And I suppose if-- the legacy I might be proudest of is the example I set for others who are coming after me.

STEVE LIESMAN: Don, I wanted to ask you one more question about the financial crisis. I didn't get to ask this one. Was-- was there a moment when you were actually scared that you didn't think you could control the situation?

DONALD KOHN: I was pretty concerned-- in the week or two after Lehman. And-- particularly when the commercial paper market was cratering. The money market fund had-- reserve prime fund-- or prime reserve fund, whatever it's called, had "broken the buck." Other money funds were experiencing runs. Lots of corporations, financial-- non-financial corporations weren't able to raise money, because banks couldn't lend. The commercial paper market was shut down.

That, say, four week period, I think, from the middle of September through the middle of October was a very-- very concerning period. I don't know if I was scared, but I certainly was very worried. And-- knew that we had to bring everything we could to bear on that situation. We were in a panic. And we had to deal with the panic not only as the Federal Reserve, but as the U.S. Government. I mean, that was-- the TARP going up-- TARP. Ben-- and-- and Hank Paulson saying, you know-- Ben saying to Hank, "You've pushed the Federal Reserve-- we-- we have used all our tools. You-- we can't be expected to put capital in these institutions. You need to go to the Congress."

…and Hank already having thought about that. And said, "You're right, Ben, we gotta go to Congress." And then Congress rejecting it at first. So-- that time through the G7-- first or second week of October, when the international central bankers and finance ministers were in town. And kind of a consensus arose that we needed to put capital into banks. We needed to guarantee deposits. We needed to bring lots of liquidity to bear on the situation. That four or five week period, I think, was a very-- to me, the financial system was already sliding down in a very precipitate way. And-- we needed to reverse it.

STEVE LIESMAN: When you decided to retire that week or-- in retrospect, would you have done everything you could have to save Lehman? I think we-- we didn't have the tools. The resolution authority, as I said before, is really important. Because it gives the government authorities more tools to work with. So, I think Lehman-- suffered-- was suffering a capital problem. As well as a liquidity problem. The two were intimately intertwined.

The economy was already on a downhill slide. And a pretty steep one. A revision to third quarter '08 GDP-- confirms what was kind of obviously, at the time. Other financial institutions were very, very worried. Fannie and Freddie had been closed up the week before, I think. In the first week of September, last week of August, first week of September. No one wanted to buy Lehman. And-- one can understand why. So, I-- I don't think we had-- we didn't have the tools to deal with that situation. But I think the Secretary of the Treasury, the FDIC, the Federal Reserve will have the tools to deal with it next time.

STEVE LIESMAN: Don, I want to take about five minutes to talk about the current situation. And then you can go retire.

DONALD KOHN: Okay. All right. Good. That's a good note to retire on, I think.

STEVE LIESMAN: What the Fed just did to keep the balance sheet the same. Would people be wrong to read that as a signal or an omen of additional quantitative easing to come?

DONALD KOHN: Certainly there's nothing automatic leading from that to further quantitative easing to come. I think the fact that we did that was-- suggestive of-- of a deterioration in the overall economic outlook. As Chairman Bernanke said at Jackson Hole. The situation had deteriorated. We weren't seeing the kind of progress on jobs-- that we had been seeing in the spring. Inflation was low and if anything getting lower. And those were circumstances under which we-- the central bank really shouldn't be tightening policy in any way shape, or form. That doesn't mean that those guys, my ex-colleagues.

STEVE LIESMAN: …ex-colleagues.

DONALD KOHN: Soon to be ex-colleagues at the next meeting will definitely take another step. I think as the Chairman said in Jackson Hole, they would be looking at the forecast, looking to see whether it had deteriorated further. So, it's not a signal of something to come. It is a signal that the outlook is not as good as it was in the spring. And they're gonna have to watch very carefully.

STEVE LIESMAN: One of the issues is if the Fed did more, what good would it do?


STEVE LIESMAN: Could you explain why additional printing of money is a viable tool? Why it would help the economy?

DONALD KOHN: I do think-- there are certain things the Federal Reserve could do that would lower interest rates a little bit further. I agree-- I think we need to start with the recognition that we have done a heck of a lot. We have an extraordinarily accommodative…We have negative real short term interest rates. We have a ten year, long term interest rate in the…market of about one percent, I think, if I remember correctly.

Extraordinarily low rates. So, the Federal Reserve-- the Federal Reserve has increased its balance sheet, as you noted, up to $2 trillion of longer term assets. Taking those off the market and encouraging private-- private individuals to buy other long term assets. Thereby driving down-- driving down intermediate and longer term interest rates across a broad array of markets. We have an incredible amount of accommodation and stimulus in place.

Could we do more? I think we could. I think-- if they decide to adjust the language-- the Chairman covered these options at Jackson Hole. There's language adjustment. There's interest on excess reserves. And there's the purchase of more long term assets. I think those things can be effective at lowering intermediate and longer term interest rates a little bit further.

How effective is one of the uncertainties he pointed to in saying it's hard to judge what to do and how much to do. But I don't think we're-- we're not out of tools. Lowering interest rates will hopefully not only reduce the cost of capital for businesses. But it would-- bolster asset prices, equity prices, housing prices. So, I think lower, intermediate and long term interest rates would be helpful.

As he also said, there are-- have other policies, monetary policy can't solve every problem in the economy. But I think if the situation deteriorates, as he described it, as he laid out the criteria. Then I think monetary policy should do what it can to-- to help. So, that'll be the decision for my successors.

STEVE LIESMAN: A big question, though, is the trigger and the calibration. In other words, what-- what brings you in and how much you come in by. Do we know-- what $100 billion worth of additional Treasury purchases is worth relative to interest rates?

DONALD KOHN: There are estimates, Steve, but they're not very-- reliable, because we don't have much experience with that. So, I think-- I-- I'm pretty sure I know the sign. I'm pretty sure $100 billion would lower interest rates. It would lower interest rates both by lowering the term premium through the preferred habitat-- channel that the Chairman talked about.

But also, I think, by sending a signal that we intend to keep-- we're worried and the short term rate'll be lower for longer. How much is-- is-- is hard to say. In terms of triggers-- speaking just for myself, I'm not-- obviously not speaking for my soon to be ex-colleagues. I would be concerned if I thought we weren't making progress towards our two legislative objectives.

One of them is maximum employment. And the other one is price stability. Right now, inflation is below where most members of the committee think it should be over the long run to promote both of those-- both of those-- both of those objectives. In the forecast that most F.O.M.C. members have been making, there's a gradual increase in inflation, a gradual decline in-- unemployment. I think it's really important that we see that there's progress towards those goals. But I-- I-- I recognize--

STEVE LIESMAN: So, you had a short trigger, if you had stayed on, it sounds like.

DONALD KOHN: No, because that progress could be out in the future. So, I think--

STEVE LIESMAN: Right. Do-- do you feel like we're making that progress now?

DONALD KOHN: I think we're not making it right now, but I do agree with his forecast that growth would pick up next year, is more likely to pick up next year. That-- some of the headwinds facing the economy will abate and growth will strengthen. Households and banks will have repaired balance sheets. More credit will become more available. House prices have already flattened out.

So, the negative wealth effects of that will be reduced. So, I think it's a reasonable prospect to think about stronger growth next year. So, I-- no, I don't think I'd be on a hair trigger. I-- I would-- I would want to look very carefully at how strong-- what the prospects were and--

STEVE LIESMAN: So, you-- you would have been willing to give it a little more time to-- for it to clarify itself as to the direction of the economy before you were-- you would have agreed to additional…?

DONALD KOHN: It would depend on what-- I-- I don't know what I would have done at the next meeting, if that's what you're asking. And I-- and I don't want to-- I don't want to predict, because I--

STEVE LIESMAN: No, I-- I understand that. But my-- my-- my question was how-- sort of how close were-- were you to that trigger that you mentioned? That we weren't making progress? Were you ready to make that decision? You weren't-- had you already made the decision we were making progress?


STEVE LIESMAN: It was prospectively. It was something--

DONALD KOHN: It was prospectively that I was concerned about-- I think among other things we had several months of slower growth. And concerns about household spending in particular. And I think we need some time-- have needed some time to see whether that was just a soft patch. Or whether it was gonna-- gonna persist--

STEVE LIESMAN: Because somebody described to me the-- decision that was made in August as one that was really biding time till the situation clarified?

DONALD KOHN:I didn't see it that way.


DONALD KOHN: I saw it as a decision that we should have made given what we saw at the time. And I didn't know what we should be doing next. I need-- I mean, every monetary policy decision depends on what happened-- the incoming data and how you process it. So, I don't see this decision as any different from a decision if we had lowered interest rates from four percent to three and three quarters in August. And then said, "Well, let's see where we are in September to decide what we want to do."

STEVE LIESMAN: So, you were ready to see where…Would it be wrong to say that you were ready to pull the plug on additional…? That would not be where you…?

DONALD KOHN: I was ready to see how the data were going to--

STEVE LIESMAN: You're still talking like a central banker.

DONALD KOHN: I am-- I am. There's still a central banker in me.

STEVE LIESMAN: Last-- last thing. 30 years, 35 years. Any unfinished business?

DONALD KOHN: Not really. I mean, I think I felt comfortable leaving when I sent the letter to the President. And I felt like I had accomplished a lot. To some extent, there's always unfinished business. And I think the unfinished business here is steering the economy back to full employment and price stability. Implementing Dodd/Frank and making the financial system safer and more resilient. It's a huge-- both of those are very, very substantial-- very, very substantial tasks. I will be watching with interest as a sympathetic observer as my colleagues carry them out.

STEVE LIESMAN: Don, you've been very generous with your time. Thank you very much.

DONALD KOHN: Thank you, Steve.

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