What Did The Government Do About The 2008 Recession?

The 2008 Great Recession may have developed into the second Great Depression if TARP, ARRA, and the Economic Stimulus Plan had not been adopted.

What role did the government play in the 2008 financial crisis?

The Great Recession lasted from December 2007 to June 2009, making it the longest downturn since World War II. The Great Recession was particularly painful in various ways, despite its short duration. From its peak in 2007Q4 to its bottom in 2009Q2, real gross domestic product (GDP) plummeted 4.3 percent, the greatest drop in the postwar era (based on data as of October 2013). The unemployment rate grew from 5% in December 2007 to 9.5 percent in June 2009, before peaking at 10% in October 2009.

The financial repercussions of the Great Recession were also disproportionate: home prices plummeted 30% on average from their peak in mid-2006 to mid-2009, while the S&P 500 index dropped 57% from its peak in October 2007 to its trough in March 2009. The net worth of US individuals and charity organizations dropped from around $69 trillion in 2007 to around $55 trillion in 2009.

As the financial crisis and recession worsened, worldwide policies aimed at reviving economic growth were enacted. Like many other countries, the United States enacted economic stimulus measures that included a variety of government expenditures and tax cuts. The Economic Stimulus Act of 2008 and the American Recovery and Reinvestment Act of 2009 were two of these projects.

The Federal Reserve’s response to the financial crisis varied over time and included a variety of unconventional approaches. Initially, the Federal Reserve used “conventional” policy actions by lowering the federal funds rate from 5.25 percent in September 2007 to a range of 0-0.25 percent in December 2008, with the majority of the drop taking place between January and March 2008 and September and December 2008. The significant drop in those periods represented a significant downgrading in the economic outlook, as well as increasing downside risks to output and inflation (including the risk of deflation).

By December 2008, the federal funds rate had reached its effective lower bound, and the FOMC had begun to utilize its policy statement to provide future guidance for the rate. The phrasing mentioned keeping the rate at historically low levels “for some time” and later “for an extended period” (Board of Governors 2008). (Board of Governors 2009a). The goal of this guidance was to provide monetary stimulus through lowering the term structure of interest rates, raising inflation expectations (or lowering the likelihood of deflation), and lowering real interest rates. With the sluggish and shaky recovery from the Great Recession, the forward guidance was tightened by adding more explicit conditionality on specific economic variables such as inflation “low rates of resource utilization, stable inflation expectations, and tame inflation trends” (Board of Governors 2009b). Following that, in August 2011, the explicit calendar guidance of “At least through mid-2013, the federal funds rate will remain at exceptionally low levels,” followed by economic-threshold-based guidance for raising the funds rate from its zero lower bound, with the thresholds based on the unemployment rate and inflationary conditions (Board of Governors 2012). This forward guidance is an extension of the Federal Reserve’s conventional approach of influencing the funds rate’s current and future direction.

The Fed pursued two more types of policy in addition to forward guidance “During the Great Recession, unorthodox” policy initiatives were taken. Credit easing programs, as explored in more detail in “Federal Reserve Credit Programs During the Meltdown,” were one set of unorthodox policies that aimed to facilitate credit flows and lower credit costs.

The large scale asset purchase (LSAP) programs were another set of non-traditional policies. The asset purchases were done with the federal funds rate near zero to help lower longer-term public and private borrowing rates. The Federal Reserve said in November 2008 that it would buy US agency mortgage-backed securities (MBS) and debt issued by housing-related US government agencies (Fannie Mae, Freddie Mac, and the Federal Home Loan banks). 1 The asset selection was made in part to lower the cost and increase the availability of finance for home purchases. These purchases aided the housing market, which was at the heart of the crisis and recession, as well as improving broader financial conditions. The Fed initially planned to acquire up to $500 billion in agency MBS and $100 billion in agency debt, with the program being expanded in March 2009 and finished in 2010. The FOMC also announced a $300 billion program to buy longer-term Treasury securities in March 2009, which was completed in October 2009, just after the Great Recession ended, according to the National Bureau of Economic Research. The Federal Reserve purchased approximately $1.75 trillion of longer-term assets under these programs and their expansions (commonly known as QE1), with the size of the Federal Reserve’s balance sheet increasing by slightly less because some securities on the balance sheet were maturing at the same time.

However, real GDP is only a little over 4.5 percent above its prior peak as of this writing in 2013, and the jobless rate remains at 7.3 percent. With the federal funds rate at zero and the current recovery slow and sluggish, the Federal Reserve’s monetary policy plan has evolved in an attempt to stimulate the economy and meet its statutory mandate. The Fed has continued to change its communication policies and implement more LSAP programs since the end of the Great Recession, including a $600 billion Treasuries-only purchase program in 2010-11 (often known as QE2) and an outcome-based purchase program that began in September 2012. (in addition, there was a maturity extension program in 2011-12 where the Fed sold shorter-maturity Treasury securities and purchased longer-term Treasuries). Furthermore, the increasing attention on financial stability and regulatory reform, the economic consequences of the European sovereign debt crisis, and the restricted prospects for global growth in 2013 and 2014 reflect how the Great Recession’s fallout is still being felt today.

YPFS Cases

“An Overview of the Government’s Reaction,” p. 7. In Charts: Five Years After the Financial Crisis: Response, Reform, and Progress
“From September 1, 2008, to March 2009, U.S. Government Responses to the Financial Crisis,” The Investment Company Institute is a non-profit organization dedicated to the advancement
Lending & Credit Programs for Depository Institutions (A): The Federal Reserve’s Financial Crisis Response
Lending & Credit Programs for Primary Dealers (B): The Federal Reserve’s Financial Crisis Response
The Federal Reserve’s (C) Response to the Financial Crisis: Providing US Dollars to Foreign Central Banks
Commercial Paper Market Facilities (D): The Federal Reserve’s Response to the Financial Crisis
The Term Asset-Backed Securities Loan Facility (E) is the Federal Reserve’s response to the financial crisis.
Haircuts and Resolutions (A): Guarantees and Capital Infusions in Response to Financial Crises
U.S. Guarantees During the Global Financial Crisis (B): Guarantees and Capital Infusions in Response to Financial Crises
Guarantees and Capital Infusions in the Face of Financial Crises (C): Stress Tests in the United States in 2009

Books

“Federal Reserve 2008: A Timeline of Fed Actions and Financial Crisis Events,” (Federal Reserve 2008: A Timeline of Fed Actions and Financial Crisis Events The Wall Street Journal is a newspaper published in the United States.
“A Timeline of the Global Economic and Financial Crisis,” The University of Pennsylvania is located in Philadelphia, Pennsylvania.
The Financial Crisis on a Map YPFS and the Hutchins Center for Fiscal and Monetary Policy at the Brookings Institution (2018)

Treasury’s Response

The Federal Reserve (commonly known as the Fed) is the United States’ central bank. Ben Bernanke was the Chairman of the Federal Reserve throughout the crisis.
The Federal Reserve is in charge of the country’s monetary policy in order to help the country meet its congressionally mandated goals of maximum employment, price stability, and moderate long-term interest rates. The Fed also regulates banks to safeguard the banking system’s safety and soundness, and it contributes to financial system stability by containing financial systemic risk.
The Fed played a critical role as a Lender of Last Resort throughout the financial crisis. This meant depository institutions could borrow money from the Fed even if they couldn’t get it elsewhere. The Fed could only lend to traditional depository institutions during normal times (e.g. commercial banks, credit unions, savings and loans banks). For the first time since the Great Depression, the Fed utilized its emergency powers to lend to financial organizations that were not depository institutions (nonbanks), such as broker-dealers, investment banks, and mutual funds, during the Crisis.
In 2007, the Fed used standard techniques to try to stabilize the economy, such as providing liquidity and lowering interest rates.
The Fed began using more unconventional emergency techniques in 2008, beginning with its March 2008 aid to Bear Stearns, the fifth largest investment bank.
After Lehman Brothers (the fourth largest investment bank and the first major nonbank to fall) collapsed in September 2008, the Federal Reserve used its emergency powers to make extraordinary liquidity facilities broadly available. To sustain the value of the dollar, stabilize financial systems, and support the economy, it lent trillions of dollars to banks and nonbanks in the United States and around the world.
Expired Policy Tools (including the Federal Reserve’s Financial Crisis Financing Programs) can be found on the Federal Reserve’s website.
Credit and Liquidity Programs Archive on the Federal Reserve Bank of New York’s website
The US Treasury Department is in charge of the country’s fiscal policy. Henry Paulson was the Secretary of the Treasury during the outset of the crisis. Timothy Geithner, the former President of the Federal Reserve Bank of New York (FRBNY), took over as Secretary on January 26, 2009.
The Treasury collaborated closely with the Federal Reserve and the Federal Reserve Bank of New York throughout the crisis, particularly on early liquidity difficulties. It collaborated with these and other agencies, including the FDIC and the FHFA, to plan a comprehensive response to save the financial system and defend the economy.
Until Congress established the Troubled Asset Relief Program (TARP) in October 2008, the Treasury had little legal authority to take action and had extremely limited funding authority.
Secretary Paulson was a key figure in the passage of the Troubled Asset Relief Program (TARP), which gave the Treasury $700 billion to battle the crisis.
Secretary Paulson also played a key role in the passing of new legislation (the Housing and Economic Recovery Act (HERA)) that permitted Fannie Mae and Freddie Mac to be placed under conservatorship. Treasury also aided a variety of efforts aimed at restoring stability to the housing market and other businesses, such as the car industry.

Other Specific Government Actions

By guaranteeing deposits in banks up to a specified amount, addressing risks to deposit insurance funds, and controlling the economic implications of a bank failure, the Federal Deposit Insurance Corporation (FDIC) promotes public trust in the United States financial system. Sheila Bair was the FDIC Chair during the crisis.
The Federal Deposit Insurance Corporation (FDIC) undertook a number of critical policies to help stabilize the banking industry.
It used the Federal Deposit Insurance Corporation Improvement Act of 1991’s “systemic risk exception,” which allowed it to deviate from its “least-cost” criteria when dealing with failing banks.
The FDIC implemented two programs under the auspices of the SRE: (1) the Debt Guarantee Program (DGP), which extended the FDIC’s guarantee to newly issued debt instruments of FDIC-insured institutions, their holding companies, and affiliates; and (2) the Transaction Account Guarantee Program (TAGP), which provided unlimited deposit insurance coverage of non-interest-bearing transaction accounts. The DGP and TAGP were key components of a broader government response to systemic risk in the banking sector, and they are widely regarded as successful. At its peak, the FDIC guaranteed nearly $350 billion in newly issued bank debt under the DGP. The FDIC guaranteed about $800 billion in non-interest-bearing transaction accounts at member banks until year-end 2010, providing insurance over the statutory amount and preventing runs. The fees received for the programs much outweighed any government losses.
In addition, the FDIC used its “systemic risk exception” authority to aid Wachovia, Citigroup, and Bank of America, three of the four largest banking institutions. Finally, the FDIC played a critical role in resolving failed banks and placing them under receivership.
Following the financial crisis’ stability, the government established the Financial Disaster Inquiry Commission to look into the causes of the crisis. Hearings were held, data and information was acquired, and the commission went into the details. Its final report, which is considered the definitive study on the crisis, was released in February 2011.
Dodd-Frank In reaction to the crisis, the Wall Street Reform and Consumer Protection Act was passed on July 21, 2010. It was the most significant change to the financial regulatory structure in the United States since the Great Depression. The act overhauled the system, removing the Office of Thrift Supervision, reassigning additional responsibilities to the FDIC and the Federal Reserve, and establishing the Consumer Financial Protection Bureau as a new consumer agency.
The act also established the Financial Stability Oversight Council (FSOC) and the Office of Financial Research, which are tasked with identifying risks to the financial system’s stability before they become crises.
The Federal Reserve was given new powers to control systemically significant institutions (SIFIS) that the FSOC would designate, which may include nonbanks. To deal with the liquidation of large companies, Dodd-Frank mandated that SIFIs submit resolution plans (also known as “living wills”) to the government and established the Orderly Liquidation Authority, which would allow the FDIC, which has a long history of resolving banks, to intervene in failing SIFIs.

What exactly does the government bailout entail?

A bailout is the providing of financial assistance to a company or country that is on the verge of bankruptcy.

A bailout is distinct from a bail-in, which requires bondholders or depositors of global systemically important financial institutions (G-SIFIs) to participate in the recapitalization process but not taxpayers. Some governments have the authority to intervene in the insolvency process; for example, the United States government intervened in the GM bailout from 2009 to 2013. A bailout can, but does not always, keep a company from going bankrupt. The phrase bailout comes from the maritime world, and it refers to the act of evacuating water from a sinking ship with a bucket.

In times of crisis, what role should the government play quizlet?

The federal government’s responsibility in the recovery should be to assist people when they are most in need.

Who is responsible for the 2008 Great Recession?

The Lenders are the main perpetrators. The mortgage originators and lenders bear the brunt of the blame. That’s because they’re the ones that started the difficulties in the first place. After all, it was the lenders who made loans to persons with bad credit and a high chance of default. 7 This is why it happened.

Who profited the most from the financial crisis of 2008?

Warren Buffett declared in an op-ed piece in the New York Times in October 2008 that he was buying American stocks during the equity downturn brought on by the credit crisis. “Be scared when others are greedy, and greedy when others are fearful,” he says, explaining why he buys when there is blood on the streets.

During the credit crisis, Mr. Buffett was particularly adept. His purchases included $5 billion in perpetual preferred shares in Goldman Sachs (NYSE:GS), which earned him a 10% interest rate and contained warrants to buy more Goldman shares. Goldman also had the option of repurchasing the securities at a 10% premium, which it recently revealed. He did the same with General Electric (NYSE:GE), purchasing $3 billion in perpetual preferred stock with a 10% interest rate and a three-year redemption option at a 10% premium. He also bought billions of dollars in convertible preferred stock in Swiss Re and Dow Chemical (NYSE:DOW), which all needed financing to get through the credit crisis. As a result, he has amassed billions of dollars while guiding these and other American businesses through a challenging moment. (Learn how he moved from selling soft drinks to acquiring businesses and amassing billions of dollars.) Warren Buffett: The Road to Riches is a good place to start.)

How did the government contribute to the Great Recession?

Because it created the circumstances for a housing bubble that led to the economic downturn and because it did not do enough to avert it, the Federal Reserve was to blame for the Great Recession.

What triggered the financial crisis of 2008?

Years of ultra-low interest rates and lax lending rules drove a home price bubble in the United States and internationally, sowing the seeds of the financial crisis. It began with with intentions, as it always does.

Was the bailout profitable for the government?

Treasury Secretary Henry Paulson sponsored the Emergency Economic Stabilization Act of 2008, which was passed by the 110th United States Congress and signed into law by President George W. Bush. In the middle of the financial crisis of 20072008, the act was signed into law as part of Public Law 110-343 on October 3, 2008. The $700 billion Troubled Asset Relief Program (TARP) was established by the law to purchase toxic assets from banks. While the Treasury continued to evaluate the value of targeted asset purchases, the money for distressed asset purchases were primarily allocated to infuse capital into banks and other financial institutions.

During 2007 and 2008, a financial crisis emerged, owing in part to the subprime mortgage crisis, which resulted in the failure or near-failure of major financial firms such as Lehman Brothers and American International Group. To prevent the financial system from collapsing, Treasury Secretary Henry Paulson proposed that the US government buy hundreds of billions of dollars in distressed assets from banking companies. Congress initially rejected Paulson’s idea, but the deepening financial crisis and President Bush’s lobbying eventually led Congress to approve Paulson’s proposal as part of Public Law 110-343.

TARP recovered $441.7 billion from $426.4 billion invested, making a $15.3 billion profit or an annualized rate of return of 0.6 percent, and possibly a loss when adjusted for inflation.

What impact did the global financial crisis of 2008 have?

The crisis caused the Great Recession, which was the worst worldwide downturn since the Great Depression at the time. It was followed by the European debt crisis, which began with a deficit in Greece in late 2009, and the 20082011 Icelandic financial crisis, which saw all three of Iceland’s major banks fail and was the country’s largest economic collapse in history, proportionate to its size of GDP. It was one of the world’s five worst financial crises, with the global economy losing more than $2 trillion as a result. The proportion of home mortgage debt to GDP in the United States climbed from 46 percent in the 1990s to 73 percent in 2008, hitting $10.5 trillion. As home values climbed, a surge in cash out refinancings supported an increase in consumption that could no longer be sustained when home prices fell. Many financial institutions had investments whose value was based on home mortgages, such as mortgage-backed securities or credit derivatives intended to protect them against failure, and these investments had lost a large amount of value. From January 2007 to September 2009, the International Monetary Fund calculated that large US and European banks lost more than $1 trillion in toxic assets and bad loans.

In late 2008 and early 2009, stock and commodities prices plummeted due to a lack of investor trust in bank soundness and a reduction in credit availability. The crisis quickly grew into a global economic shock, resulting in the bankruptcy of major banks. Credit tightened and foreign trade fell during this time, causing economies around the world to stall. Evictions and foreclosures were common as housing markets weakened and unemployment rose. A number of businesses have failed. Household wealth in the United States decreased $11 trillion from its peak of $61.4 trillion in the second quarter of 2007, to $59.4 trillion by the end of the first quarter of 2009, leading in a drop in spending and ultimately a drop in corporate investment. In the fourth quarter of 2008, the United States’ real GDP fell by 8.4% from the previous quarter. In October 2009, the unemployment rate in the United States reached 11.0 percent, the highest since 1983 and about twice the pre-crisis rate. The average number of hours worked per week fell to 33, the lowest since the government began keeping track in 1964.

The economic crisis began in the United States and quickly extended throughout the world. Between 2000 and 2007, the United States accounted for more than a third of global consumption growth, and the rest of the world relied on the American consumer for demand. Corporate and institutional investors around the world owned toxic securities. Credit default swaps and other derivatives have also enhanced the interconnectedness of huge financial organizations. The de-leveraging of financial institutions, which occurred as assets were sold to pay back liabilities that could not be refinanced in frozen credit markets, intensified the solvency crisis and reduced foreign trade. Trade, commodity pricing, investment, and remittances sent by migrant workers all contributed to lower growth rates in emerging countries (example: Armenia). States with shaky political systems anticipated that, as a result of the crisis, investors from Western countries would withdraw their funds.

Governments and central banks, including the Federal Reserve, the European Central Bank, and the Bank of England, provided then-unprecedented trillions of dollars in bailouts and stimulus, including expansive fiscal and monetary policy, to offset the decline in consumption and lending capacity, avoid a further collapse, encourage lending, restore faith in the vital commercial paper markets, and avoid a repeat of the Great Recession. For a major sector of the economy, central banks shifted from being the “lender of last resort” to becoming the “lender of only resort.” The Fed was sometimes referred to as the “buyer of last resort.” These central banks bought government debt and distressed private assets from banks for $2.5 trillion in the fourth quarter of 2008. This was the world’s largest liquidity injection into the credit market, as well as the world’s largest monetary policy action. Following a strategy pioneered by the United Kingdom’s 2008 bank bailout package, governments across Europe and the United States guaranteed bank debt and generated capital for their national banking systems, ultimately purchasing $1.5 trillion in newly issued preferred stock in major banks. To combat the liquidity trap, the Federal Reserve produced large sums of new money at the time.

Trillions of dollars in loans, asset acquisitions, guarantees, and direct spending were used to bail out the financial system. The bailouts were accompanied by significant controversy, such as the AIG bonus payments scandal, which led to the development of a range of “decision making frameworks” to better balance opposing policy objectives during times of financial crisis. On the day that Royal Bank of Scotland was bailed out, Alistair Darling, the UK’s Chancellor of the Exchequer at the time of the crisis, stated in 2018 that Britain came within hours of “a breakdown of law and order.”

Instead of funding more domestic loans, several banks diverted part of the stimulus funds to more profitable ventures such as developing markets and foreign currency investments.

The DoddFrank Wall Street Reform and Consumer Protection Act was passed in the United States in July 2010 with the goal of “promoting financial stability in the United States.” Globally, the Basel III capital and liquidity criteria have been adopted. Since the 2008 financial crisis, consumer authorities in the United States have increased their oversight of credit card and mortgage lenders in attempt to prevent the anticompetitive activities that contributed to the catastrophe.