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The Financial Crisis: Miss-Diagnosis and Reactionary Responses

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  • Robert Eisenbeis

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Abstract

This paper divides the current financial crisis into three phases and describes the policy responses to each. In Phase I policy makers misdiagnosed it as a traditional liquidity crisis. Phase II was a triage period as policy makers addressed the significant solvency problems that became apparent in the country’s largest financial institutions. Phase III was the pronounced slowdown in the real U.S. economy during which the Federal Reserve expanded its balance sheet by purchasing long term Treasuries and newly issued mortgage backed securities from GSEs. This paper describes the financial market conditions that characterized each of the three phases, describes the policy responses, and finally, attempts to sort out what we have learned and not learned from this crisis and how to handle it so far. Copyright International Atlantic Economic Society 2010

Suggested Citation

  • Robert Eisenbeis, 2010. "The Financial Crisis: Miss-Diagnosis and Reactionary Responses," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 38(3), pages 283-294, September.
  • Handle: RePEc:kap:atlecj:v:38:y:2010:i:3:p:283-294
    DOI: 10.1007/s11293-010-9235-1
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    File URL: http://hdl.handle.net/10.1007/s11293-010-9235-1
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    References listed on IDEAS

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    1. Stephen G. Cecchetti & Piti Disyatat, 2010. "Central bank tools and liquidity shortages," Economic Policy Review, Federal Reserve Bank of New York, issue Aug, pages 29-42.
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    Cited by:

    1. Herr, Hansjörg & Rüdiger, Sina & Pédussel Wu, Jennifer, 2016. "The Federal Reserve as lender of last resort during the subprime crisis: Successful stabilisation without structural changes," IPE Working Papers 65/2016, Berlin School of Economics and Law, Institute for International Political Economy (IPE).
    2. VanHoose, David, 2011. "Systemic Risk and Macroprudential Bank Regulation: A Critical Appraisal," Journal of Financial Transformation, Capco Institute, vol. 33, pages 45-60.
    3. Rüdiger, Sina, 2013. "The Federal Reserve in times of economic crisis: Paths and choices since 2007," IPE Working Papers 25/2013, Berlin School of Economics and Law, Institute for International Political Economy (IPE).

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