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The financial crisis: an inside view

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  • Swagel, Phillip

Abstract

This paper reviews the policy response to the 2007–09 financial crisis from the perspective of a senior Treasury official at the time. Government agencies faced severe constraints in addressing the crisis: lack of legal authority for potentially helpful financial stabilization measures, a Congress reluctant to grant such authority, and the need to act quickly in the midst of a market panic. Treasury officials recognized the dangers arising from mounting foreclosures and worked to facilitate limited mortgage modifications, but going further was politically unacceptable because public funds would have gone to some irresponsible borrowers. The suddenness of Bear Stearns’ collapse in March 2008 made rescue necessary and led to preparation of emergency options should conditions worsen. The Treasury saw Fannie Mae and Freddie Mac’s rescue that summer as necessary to calm markets, despite the moral hazard created. After Lehman Brothers failed in September, the Treasury genuinely intended to buy illiquid securities from troubled institutions but turned to capital injections as the crisis deepened.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 21104.

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Date of creation: 01 Apr 2009
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Handle: RePEc:pra:mprapa:21104

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Keywords: financial crisis; Treasury Department; TARP; housing; foreclosures; Lehman Brothers;

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  1. John B. Taylor & John C. Williams, 2008. "A black swan in the money market," Working Paper Series 2008-04, Federal Reserve Bank of San Francisco.
  2. Mark E Schweitzer & Guhan Venkatu, 2009. "Adjustable-rate mortgages and the Libor surprise," Economic Commentary, Federal Reserve Bank of Cleveland, issue Jan.
  3. Markus K. Brunnermeier, 2008. "Deciphering the Liquidity and Credit Crunch 2007-08," NBER Working Papers 14612, National Bureau of Economic Research, Inc.
  4. Larry Cordell & Karen Dynan & Andreas Lehnert & Nellie Liang & Eileen Mauskopf, 2008. "The incentives of mortgage servicers: myths and realities," Finance and Economics Discussion Series 2008-46, Board of Governors of the Federal Reserve System (U.S.).
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Cited by:
  1. Edward Simpson Prescott, 2010. "Introduction to the special issue on the Diamond-Dybvig model," Economic Quarterly, Federal Reserve Bank of Richmond, issue 1Q, pages 1-9.
  2. Chevallier, Julien, 2012. "Global imbalances, cross-market linkages, and the financial crisis: A multivariate Markov-switching analysis," Economic Modelling, Elsevier, vol. 29(3), pages 943-973.
  3. Pietro Veronesi & Luigi Zingales, 2009. "Paulson's Gift," NBER Working Papers 15458, National Bureau of Economic Research, Inc.
  4. Wilson, Linus, 2012. "Anchoring bias in the TARP warrant negotiations," Journal of Economics and Business, Elsevier, vol. 64(1), pages 63-76.
  5. Yacine Aït-Sahalia & Jochen Andritzky & Andreas Jobst & Sylwia Nowak & Natalia Tamirisa, 2010. "Market Response to Policy Initiatives during the Global Financial Crisis," NBER Working Papers 15809, National Bureau of Economic Research, Inc.
  6. Hoshi, Takeo & Kashyap, Anil K, 2010. "Will the U.S. bank recapitalization succeed? Eight lessons from Japan," Journal of Financial Economics, Elsevier, vol. 97(3), pages 398-417, September.
  7. Hancock, Diana & Passmore, Wayne, 2011. "Did the Federal Reserve's MBS purchase program lower mortgage rates?," Journal of Monetary Economics, Elsevier, vol. 58(5), pages 498-514.
  8. Charles Bean, 2010. "Joseph Schumpeter Lecture The Great Moderation, The Great Panic, and The Great Contraction," Journal of the European Economic Association, MIT Press, vol. 8(2-3), pages 289-325, 04-05.

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