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The Financial Crisis: An Inside View

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  • Phillip Swagel

    (Georgetown University)

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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Suggested Citation

  • Phillip Swagel, 2009. "The Financial Crisis: An Inside View," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 40(1 (Spring), pages 1-78.
  • Handle: RePEc:bin:bpeajo:v:40:y:2009:i:2009-01:p:1-78
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    File URL: https://www.brookings.edu/wp-content/uploads/2009/03/2009a_bpea_swagel.pdf
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    References listed on IDEAS

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    1. John B. Taylor & John C. Williams, 2009. "A black swan in the money market," Proceedings, Federal Reserve Bank of San Francisco, issue Jan.
    2. 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.
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    Citations

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    Cited by:

    1. Barth, James R. & Prabha, Apanard Penny, 2014. "An Analysis of Resolving Too-Big-to-Fail Banks Throughout the United States," Journal of Regional Analysis and Policy, Mid-Continent Regional Science Association, vol. 0(Issue 1).
    2. Foote, Christopher L. & Willen, Paul S., 2017. "Mortgage-default research and the recent foreclosure crisis," Working Papers 17-13, Federal Reserve Bank of Boston.
    3. Minca Andreea & Sulem Agnès, 2014. "Optimal control of interbank contagion under complete information," Statistics & Risk Modeling, De Gruyter, vol. 31(1), pages 1-26, March.
    4. 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.
    5. Aït-Sahalia, Yacine & Andritzky, Jochen & Jobst, Andreas & Nowak, Sylwia & Tamirisa, Natalia, 2012. "Market response to policy initiatives during the global financial crisis," Journal of International Economics, Elsevier, vol. 87(1), pages 162-177.
    6. 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.
    7. repec:eee:finsta:v:31:y:2017:i:c:p:1-17 is not listed on IDEAS
    8. W. Scott Frame & Andreas Fuster & Joseph Tracy & James Vickery, 2015. "The Rescue of Fannie Mae and Freddie Mac," Journal of Economic Perspectives, American Economic Association, vol. 29(2), pages 25-52, Spring.
    9. Veronesi, Pietro & Zingales, Luigi, 2010. "Paulson's gift," Journal of Financial Economics, Elsevier, vol. 97(3), pages 339-368, September.
    10. Chin Alycia & Warusawitharana Missaka, 2010. "Financial Market Shocks during the Great Depression," The B.E. Journal of Macroeconomics, De Gruyter, vol. 10(1), pages 1-27, September.
    11. Luigi Zingales, 2015. "Does Finance Benefit Society?," NBER Working Papers 20894, National Bureau of Economic Research, Inc.
    12. 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.
    13. Wilson, Linus, 2012. "Anchoring bias in the TARP warrant negotiations," Journal of Economics and Business, Elsevier, vol. 64(1), pages 63-76.
    14. 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.
    15. 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.

    More about this item

    Keywords

    macroeconomics; financial crisis; U.S. government; Bear Stearns; Lehman Brothers; Fannie Mae; Freddie Mac;

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • N2 - Economic History - - Financial Markets and Institutions
    • G01 - Financial Economics - - General - - - Financial Crises

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