GAMBIER — Government agencies often work in mysterious ways, but those attending a lecture Wednesday night at Kenyon College got a glimpse into the inner workings of the Federal Reserve and the U.S. Treasury Department.

Randall Kroszner, former governor of the Federal Reserve Board, and Phillip Swagel, former assistant secretary of the U.S. Treasury, provided some insight into the process surrounding the financial bailout given last fall to ailing financial institutions.

Of the emergency powers granted the Federal Reserve to determine which banks were saved and which were allowed to fail, Kroszner said the philosophy was to try and get the bank through until Friday, then deal with the situation over the weekend, so business could resume on Monday. Each member of the board had veto power over the other four.

“The burden of making a choice … it was quite an amazing burden to have,” he said, adding that the board had to think long term, not just of immediate results.

Kroszner said one of the areas he thinks was overlooked and not fully understood is the international nature of the crisis. While the United States was dealing with the results of risky lending through subprime mortgages, other countries such as Hungary and Poland were having trouble borrowing in their native currency, the Chinese market contracted, and the housing market in Spain and Ireland, to name two, was “out of whack.”

A “global savings glut” also contributed to the international aspect of the crisis. Kroszner said a lot of wealth was being generated in the Middle East, and money was flowing into the United States through sovereign wealth funds. In what he said was an unusual situation, money was flowing from underdeveloped countries to the developed countries.

As a result of the easy flow of money, he said, there was a low risk spread in making loans, and thus a low profit margin. Low profit margins placed the emphasis on making more loans, with not enough due diligence paid as to whether the loans could be repaid.

“More broadly, I think, we saw a breakdown of risk management worldwide,” he said.

In response, Kroszner said, the Fed made some tough choices, in particular cutting interest rates at a time when prices were rising.

“We were making our policy based on forecasting,” he said, “which is based on what will happen. It’s very difficult to make forward-looking policy because it’s based on forecast. It’s based on models, but you have to understand the limits of those models.

“We got that call right, because inflation is almost nonexistent now,” he added.

With lower interest rates, Kroszner said the Fed focused on segments of the financial market that had locked up, specifically commercial paper and stabilizing the housing market. Ways the Fed did that was through buying Fannie Mae and Freddie Mac debt, and buying mortgage-backed securities and long-term treasuries.

The credibility of the Fed lies not only in its response to short-term challenges, but also long-term challenges, he said, and future regulation reform needs to include procedures for over-the-counter transactions such as derivatives and credit default swaps. Although he believes there is a “pretty efficient system” in dealing with commercial banks — depositors know that through the FDIC they will get their money back in case of a bank failure — there is no such process with these private transactions.

Swagel said he believes the Federal Reserve, working with the treasury department, took the steps necessary to improve stability in the financial crisis.

“The treasury didn’t get everything right, but it took broad action that helped stabilize the situation, and put the current administration in the position of being able to deal with it,” he said.

At the treasury, the question was how to protect consumers, how to protect taxpayers, and how to protect markets and institutions. Swagel said the treasury focused on three areas, the first of which was “winnowing the banking system,” or determining which banks, if public money was used, would survive.

“If a bank is viable, you don’t have public money flowing to that institution,” he said.

The second area was recapitalizing the banks by putting public money into them to make sure they would survive. Swagel joked that once it was determined which banks would be saved, treasury officials went to Congress and said, ‘Everything is OK, we just need $500 billion to fix it.’

“[Recapitalization] is the accomplishment of TARP,” he said, referring to the money Congress appropriated for the Targeted Asset Relief Program.

Swagel said the Treasury Department did not get around to the third area, which is providing certainty on the balance sheets of financial institutions. In other words, finding out what the assets are and how much they are worth. This, he said, is what President Obama’s administration is in the process of doing.

The ultimate goal, he said, is to withdraw the public money and have private sector capital in the financial system.

Krozner was a member of the Federal Reserve from 2006 through January 2009. He said Fed Chairman Ben Bernanke has been “incredibly calm” through the whole financial situation.

Swagel was a member of the Treasury Department from December 2006 through January 2009. He worked with Treasury Secretary Hank Paulson throughout the financial crisis.