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Fed's action towards crisis[edit]
The expansion of central bank lending in response to the crisis was not only confined to the Federal Reserve's provision of aid to individual financial institutions. The Federal Reserve has also conducted a number of innovative lending programs with the goal of improving liquidity and strengthening different financial institutions and markets, such as Freddie Mac and Fannie Mae. In this case, the major problem among the market is the lack of free cash reserves and flows to secure the loans. The Federal Reserve took a number of steps to deal with worries about liquidity in the financial markets. One of these steps was a credit line for major traders, who act as the Fed's partners in open market activities. [1]Also, loan programs were set up to make the money market mutual funds and commercial paper market more flexible. Also, the Term Asset-Backed Securities Loan Facility (TALF) was put in place thanks to a joint effort with the US Department of the Treasury. This plan was meant to make it easier for consumers and businesses to get credit by giving Americans who owned high-quality asset-backed securities more credit.
Before the crisis, the Federal Reserve's stocks of Treasury securities were sold to pay for the increase in credit. This method was meant to keep banks from trying to give out their extra savings, which could cause the federal funds rate to drop below where it was supposed to be.[2]However, in October 2008, the Federal Reserve was granted the power to provide banks with interest payments on their surplus reserves. This created a motivation for banks to retain their reserves instead of disbursing them, so reducing the need for the Federal Reserve to hedge its increased lending by decreases in alternative assets.[3]
Money market funds also went through runs when people lost faith in the market. To keep it from getting worse, the Fed said it would give money to mutual fund companies. Also, Department of Treasury said that it would briefly cover the assets of the fund. Both of these things helped get the fund market back to normal, which helped the commercial paper market, which most businesses use to run. The FDIC also did a number of things, like raise the insurance cap from $100,000 to $250,000, to boost customer trust. [4][5]
The Fed also started a series of things called Quantitative Easing, known as QE, which added more than $4 trillion to the financial system and got banks to start lending again, both to each other and to people. Many homeowners who were trying to keep their homes from going into default got housing credits. A package of policies was passed that let borrowers refinance their loans even though the value of their homes was less than what they still owed on their mortgages. [5]
- ^ Fox, Justin (2013-11-01). "What We've Learned from the Financial Crisis". Harvard Business Review. ISSN 0017-8012. Retrieved 2023-09-29.
- ^ "Financial crisis of 2007–08 | Definition, Causes, Effects, & Facts | Britannica Money". www.britannica.com. 2023-08-14. Retrieved 2023-09-29.
- ^ "Visualizing the Financial Crisis | Yale School of Management". som.yale.edu. Retrieved 2023-09-29.
- ^ "What Was the Financial Crisis of 2007–2008? Causes, Outcomes & Lessons Learned". TheStreet. Retrieved 2023-10-05.
- ^ a b Novik, Vitaliy (2020-11-15). "How The 2008 Financial Crisis Was Solved". Big Economics. Retrieved 2023-10-05.