Roger W. Ferguson, Jr. served as a member of the Federal Reserve Board of Governors from 1997 to 2006. From October 1999 through the end of his term, he was vice chair of the Federal Reserve.
When terrorists crashed two planes into the Twin Towers in Lower Manhattan twenty-five years ago, they struck at the heart of the American financial system and put the global financial system in jeopardy.
The brave actions by first responders to save lives are well known. Less well known are steps taken by the Federal Reserve and others to ensure the American financial system did not crash.
During national emergencies, people tend to hoard everything from groceries to cash. In extreme cases, there can be a run on the banks, which cascades into a liquidity crisis. The value of assets plummets, companies cannot fulfill obligations, banks are unwilling to lend money against collapsing collateral, and the knock-on effects, including chains of bankruptcies, can be devastating.
If ever there was a national emergency, 9/11 was it. Working at Federal Reserve headquarters on the morning of the attacks, I knew we had to act quickly. However, Chairman Alan Greenspan, New York Fed President William McDonough and Treasury Secretary Paul O'Neill were all out of the country and unable to engage quickly. As vice chairman and the only governor in Washington, I had final say on the Fed's initial response.
The banking system was central to both the problem and the solution. Damage to the country's financial infrastructure was widespread. Firms that suffered damage (and in many cases, a tragic loss of life) in lower Manhattan included American Express, Bank of New York, Citibank, Charles Schwab, JPMorganChase, MetLife, Morgan Stanley, Citigroup's Salomon Smith Barney, Merrill Lynch, Lehman Brothers and OppenheimerFunds.
Despite the devastation to their operations, banks were key to preventing a financial meltdown. The Fed is designed to work through the banking system to ensure financial stability. This was one of the implicit founding principles of the Fed, with its mission of "elastic" currency working with and through national banks. The Fed's success in maintaining confidence in the hours, days and weeks following the 9/11 attacks validated its reliance on the banking system as a mechanism for supporting the broader economy.
Less than an hour after the first plane struck the North Tower, we issued a statement indicating that Fedwire, the Fed's payment system, was operating normally and would remain open as long as needed to allow payments to flow. We quickly followed with a second statement to further reassure markets that the Fed would provide liquidity.
We then took aggressive action to keep money flowing. We increased lending from the discount window to record levels. These overnight loans helped financial institutions get funds needed to finance their day-to-day operations. Typically, a bank is expected to try other means of raising funds before coming to the window. We let it be known the windows were open for all comers to cover unexpected shortfalls. Normally, we averaged $59 million in discount loans outstanding, but on September 12, that figure ballooned to $45 billion.
The Open Markets Desk also bought a large amount of U.S. Treasury securities through repurchase agreements, further injecting money into the system. We ordered the trading desk to buy all securities offered for sale at the federal funds rate, which was not standard practice. Securities held by the Fed more than doubled to $61 billion.
As a regulator, we worked with the Comptroller of the Currency to urge commercial banks to lend freely to counterparties and restructure loans for borrowers with temporary liquidity problems. To assist, we made additional funds available.
Within days, the Federal Open Market Committee eased monetary conditions by lowering the target federal funds rate by 50 basis points.
The Fed also leveraged its role in the check clearing system. In 2001, the clearing of checks was still done physically across a network of banks, ATMs, Federal Reserve Banks and clearinghouses. The Fed's fleet of 100 airplanes flew millions of checks around the country every night. On 9/11, that process was disrupted when the FAA grounded all U.S. air travel. In addition to improvising a truck delivery system to drive checks around the country, the Fed dramatically increased "float" — the money it credits to check depositors that has not yet been debited from check writers. Despite processing delays, we provided credit for checks on the usual availability schedules. This enabled businesses and consumers to promptly withdraw proceeds of check deposits. This innovation in crisis management had not been called upon in prior incidents.
Finally, we needed to keep money flowing around the world to prevent the collapse of the global settlement system. We negotiated temporary swap agreements to provide liquidity to foreign central banks that had assets and liabilities in dollars. These currency swap lines provided $90 billion of dollar-denominated liquidity, the first time this had been done on such a scale.
Steps we did not take were just as important. During one meeting, a Treasury official suggested a government-mandated closure of banks. No one else on the call seemed opposed, but I strongly objected. We were trying to keep liquidity in the system, not cut off access. I was worried about the message we would send about the magnitude of the crisis if we declared a bank "holiday." To my mind, it would amplify the shock to the system and risk creating a national banking crisis. Fortunately, the group dropped the idea.
In the end, our efforts achieved the desired outcome: the banking system operated effectively and the U.S. economy bounced back relatively quickly from an unprecedented shock that could have resulted in a deep recession. Many steps we took were unprecedented in form or scale, but they were appropriately calibrated to the crisis. We also knew most of what we were doing to provide liquidity would be quickly unwound.
Today we can see that 9/11 was not only the first major financial crisis of the 21st century; our response also demonstrated the power of a central bank using all its tools, and improvising new ones, to ward off a crisis.
