What Did The Government Do During The Great Recession?

During times of national crises, Congress has responded by directing federal resources and programs to help struggling Americans. While it is critical to respond rapidly to crises, it is also critical to ensure that federal programs and public resources are used as intended.

The GAO’s involvement during times of crisis is examined in today’s WatchBlog piece, which focuses on the federal response to the Great Depression, the Great Recession, and the coronavirus outbreak.

When the stock market crashed in 1929, precipitating the lengthy period of economic decline known as the Great Depression, GAO was still a relatively young organization.

In reaction to the Great Depression, Congress passed President Franklin D. Roosevelt’s New Deal, which included $41.7 billion in funding for domestic initiatives such as unemployment compensation.

GAO’s workload grew as federal funds were poured into the 1930s’ recovery and relief efforts. GAO, which had around 1,700 employees at the time, quickly ran out of employees and needed to hire more to handle paperwork such as vouchers. Our staff had nearly tripled to 5,000 by 1939.

Our auditors began extending their involvement in overseeing federal programs at the same time. Fieldwork in Kentucky and numerous southern states began in the mid-1930s, and included examinations of government agriculture programs. This steady shift in goal from acting as federal accountants to serving as program and policy analysts would last until 2003, when the General Accounting Office was renamed the Government Accountability Office.

The Great Recession, which began in December 2007, was widely regarded as the country’s worst economic downturn since the Great Depression.

As a result, Congress passed the American Recovery and Reinvestment Act of 2009, which contained $800 billion in stimulus funding to help the economy recover.

GAO was given a number of tasks under the Recovery Act to help enhance accountability and openness in the use of those funds. For example, we conducted bimonthly assessments of how monies were spent by various states and municipalities. In addition, we conducted specialized research in areas such as small company loans, education, and trade adjustment aid.

Despite the fact that the Great Recession ended in 2009, we are still investigating its effects on the soundness of our financial system and related government support. For example, in response to the 2008 housing crisis, the Treasury Department established three housing programs utilizing TARP funds to assist struggling homeowners avoid foreclosure and keep their homes. TARP programs were assessed every 60 days during the recession and subsequent years, and we proposed steps to improve Treasury’s management and use of funds. This effort continues today, with annual audits of TARP financial statements and updates on active TARP projects. In December 2020, we released our most current report.

We’re also keeping an eye on the health of the nation’s housing finance system, which includes Fannie Mae and Freddie Mac, which buy mortgages from lenders and either hold them or bundle them into mortgage-backed securities that can be sold.

Fannie Mae and Freddie Mac were taken over by the federal government in 2008, and the role has remained unchanged for the past 13 years, keeping taxpayers on the line for any possible losses sustained by the two corporations. We wrote about the dangers of this prolonged conservatorship and the need to overhaul the home finance system in January 2019.

Congress approved $4.7 trillion in emergency funding for people, businesses, the health-care system, and state and municipal governments in response to the pandemic. We’ve been following the federal response by, among other things, providing reports on the pandemic’s and response efforts’ effects on federal programs and operations on a regular basis.

Vaccine development and distribution, small business lending, unemployment payments, economic relief checks, tax refund delays, K-12 and higher education’s response to COVID-19, housing protections, and other topics have all been covered in our work.

On July 19, we released our most recent report on the federal response, as well as our recommendations for how this effort might be improved further. In October, we will publish our next report. Visit our Coronavirus Oversight page often because we’ll keep you updated on the federal reaction to COIVD-19 as the situation unfolds.

GAO has played a key role in overseeing federal expenditures and programs during times of crisis, and we continue to do so in more normal times. We produce hundreds of reports each year and testify before dozens of congressional committees and subcommittees on problems that affect our country. We saved taxpayers $77.6 billion in government spending in fiscal year 2020. For every dollar Congress invests in us, we get $114!

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 was the government’s response to the Great Recession of 2008?

Congress passed the Struggling Asset Relief Scheme (TARP) to empower the US Treasury to implement a major rescue program for troubled banks. The goal was to avoid a national and global economic meltdown. To end the recession, ARRA and the Economic Stimulus Plan were passed in 2009.

What did the government do to help end the recession?

The Federal Reserve’s decisive response, along with huge government expenditure, averted the US economy from collapsing completely.

The Federal Reserve cut interest rates to zero for the first time in history and initiated a quantitative easing program, in which it bought financial assets to inject additional money into the economy.

The federal government, on the other hand, is launching two major programs to help people in need:

The Struggling Asset Relief Program (TARP) helped to stabilize the economy by allowing the government to buy up to $700 billion in toxic assets, the majority of which was used to bail out troubled banks.
The American Recovery and Reinvestment Act (ARRA) is a federal law that was passed in 2009 to help the economy recover. ARRA was established in 2009 as part of a stimulus package that included tax cuts, government spending mandates, loan guarantees, and unemployment benefits.

These steps were successful in keeping the recession from becoming a decade-long affair, as was the case during the Great Depression. In 2009, the stock market began to recover. Other areas of the economy, however, took several years to recover, resulting in what economists call an L-shaped recovery.

What steps did the government take to combat the economic downturn?

Lessons for Macroeconomic Policy from the Great Recession’s Policy Challenges Eskander Alvi edited the piece. W. E. Upjohn Institute for Employment Research, Kalamazoo, MI, 2017, 137 pages., $28.32 hardback

The collapse of the U.S. housing market in 2007 triggered a series of negative economic events, including a financial crisis, high unemployment, a weakening international economy, and, ultimately, the Great Recession of 200709, the greatest post-World War II economic disaster. The housing bubble burst as a result of banks’ aggressive lending, easy credit, and mortgage securitization. The practice of pooling and repackaging financial instruments, such as mortgages, and selling them to investors is known as securitization. Lenders would securitize and sell mortgages after making loans to home buyers, obtaining more capital for lending. The subprime mortgage crisis predicted the ensuing upheaval in the banking system, most notably Lehman Brothers’ demise. Because so many industries were affected by these developmentsand because the global economy is so intertwinedthe consequences were disastrous.

Editor Eskander Alvi and his team of economists examine the tactics employed by policymakers to tackle the Great Recession in Confronting Policy Challenges of the Great Recession: Lessons for Macroeconomic Policy. Alvi forecasts the recession’s devastating economic impacts in the book’s first chapter, including huge layoffs, unpredictable financial markets, investment cutbacks, and a sinking gross domestic product. In reaction to the crisis, which resembled the Great Depression, authorities attempted to build on what had succeeded in the 1930s while also correcting what had gone wrong. Despite the fact that the Great Recession did not approach the depths of the Great Depression, it was followed by a delayed recovery and policy mistakes in fiscal and monetary policy. Alvi and his coauthors analyze the triumphs and failures of legislators who dealt with the crisis and its aftermath, the reasons for the adoption of various fiscal and monetary policy measures, and the elements for the slow recovery throughout the book.

In the aftermath of the Great Recession, the Great Depression loomed big. Emergency aid in the form of bank bailouts, as well as fiscal stimulus, were top priorities. Many common anti-recessionary policies were implemented by Congress, including tax cuts and increases in unemployment insurance and food stamp payments, which helped to prevent the crisis from extending further. Despite reaching an exceptionally high rate of 10%, unemployment was still significantly lower than the 24-percent rate seen in the 1930s. While Congress’ response to the recession was better in many ways, it also replicated several previous policy blunders. The authorities’ decision to let Lehman Brothers fail, according to one of the book’s writers, was the “one incident that most undermined the stability of global financial markets.” The choice was similar to Henry Ford’s decision to let his Guardian Group of banks to fail in the 1930s, and both incidents wreaked havoc on the financial markets. In 2010, Congress passed the DoddFrank Wall Street Reform and Consumer Protection Act in an effort to regulate lenders and safeguard customers, although this policy didn’t go nearly as far as the GlassSteagall Act, which was passed during the Great Depression. The fact that the worst-case scenario was avoided may have deterred Congress from taking additional steps to boost the economy and regulate the financial sector. Another possible contributor was public pressure on politicians as the country struggled to negotiate its way out of the recession. As Eichengreen points out, public criticism frequently influences policy decisions due to the “dominance of ideology and politics over economic research.”

After repeated criticism of the bank bailouts and mounting concerns about the national debt, fiscal stimulus came to an end. Given the severity of the recession, the lack of enthusiasm for additional fiscal policy intervention resulted in a substantially slower recovery. This inaction was the “single worst miscalculation in macroeconomic policymaking following the financial crisis in 2008,” according to Gary Burtless, who wrote one of the book’s chapters. In a similar spirit, authors Laurence Ball, J. Bradford DeLong, and Lawrence H. Summers contend that to supplement the Federal Reserve’s (Fed) attempts to raise aggregate demand, a more aggressive fiscal policyprimarily more tax cuts and government expenditure on public projectswas required. Despite popular belief that expansionary fiscal measures increase the national debt and exacerbate the problem, the authors argue that, during a recession, such programs increase the national debt in the short run but have no impact in the long run due to increased employment and output. As a result, fiscal contractions during recessions exacerbate the debt problem, prolonging the economic downturn. In the end, public pressure restricted fiscal policy during the Great Recession in numerous ways.

The Fed attempted to fill in the gaps created by the current fiscal policy discussion. Many economists feel that the country’s initial financial threat was larger during the Great Recession than it was during the Depression. Recognizing the gravity of the situation, the Fed made a conscious effort to avoid the errors of the 1930s. It lent large sums of money to foreign banks and nonbank institutions such as broker-dealers, money market funds, and buyers of securitized debt to keep credit flowing and boost consumer confidence. With the federal funds rate already near zero, the Fed used large-scale asset purchases to further slash intermediate- and long-term interest ratesa strategy known as quantitative easing. The Fed also utilized forward guidance, stating that interest rates will remain at zero for the foreseeable future. Interest rates have been lowered and asset prices have risen as a result of these efforts, according to most experts. According to the authors, the Fed was nevertheless under to the same forces that prohibited the implementation of new fiscal policy measures, albeit to a lesser extent. Some detractors argued that central bankers had no place in the mortgage-backed securities market, while others warned of hyperinflation. The Fed chairman at the time, Ben Bernanke, attempted to explain the Fed’s actions to Congress and the public, with mixed results. In order to show its independence, the Fed began decreasing its balance sheet sooner rather than later, ignoring the Depression’s lesson. Nonetheless, the authors believe that the Fed aided the economy in avoiding the worst-case scenario by implementing new monetary policy measures that can be depended on in future downturns.

Any reader interested in learning more about the Great Recession can benefit from Confronting Policy Challenges of the Great Recession: Lessons for Macroeconomic Policy. The book describes how Congress, the executive branch, and the Federal Reserve responded to the crisis, as well as the obstacles they encountered. The writers support their argument with historical comparisons (mostly to the Great Depression), visual aids such as charts and graphs, and a wealth of relevant data. While the book delves into a variety of complex economic issues, it is accessible to all readers.

How might the government have avoided the Great Recession in the first place?

The catastrophe could have been avoided if two things had happened. The first step would have been to regulate mortgage brokers who made the problematic loans, as well as hedge funds that used excessive leverage. The second would have been seen as a credibility issue early on. The government’s sole option was to buy problematic debts.

What was the UK government’s response to the 2008 financial crisis?

The Treasury began recapitalizing banks by purchasing stock and nationalizing banks that were doomed to fail. They also deposited a significant amount of money into the Financial Services Compensation Scheme to ensure that savers would not lose their money. Customers did not lose the first 50,000 of their money because they lent money straight to some insolvent institutions. Landsbanki and Heritable, both Icelandic banks, were among them. Because of the high interest rates, a large number of UK clients invested in these Icelandic banks. The most insecure banks, such as Northern Rock, RBS, and Bradford & Bingley, were then nationalized.

The BoE

The Bank of England has taken initiatives to enhance bank liquidity. They exchanged some of their risky mortgages for Treasury bills. To restore market confidence, they devised a Credit Guarantee Scheme. Certain types of unsecured loans were insured under this system. Finally, the Asset Protection Scheme was a program that all banks could participate in. The government would cover up to 90% of bank assets against losses, allowing banks to continue lending responsibly to consumers and businesses. Only RBS was able to take use of the system in the end.

At the height of the crisis, the government aided banks to the tune of 1,162 billion. The previously stated actions provided direct and indirect help to banks. The main participants were RBS, Lloyds, Northern Rock, and Bradford & Bingley, with numerous other insolvent companies receiving funding as well.

After reaching a high point in 2008/2009, the government reduced its funding. Northern Rock was sold to Virgin Money, and Lloyds was divested of its shareholding.

Repayment of the Support

One of the primary concerns among taxpayers is whether the money invested in the banks will ever be repaid. However, it is still unclear if the taxpayer will make a profit or lose money. This will only become apparent once the government has removed all supportive measures and sold all of the stock. Investing in failing banks yields much less income than a traditional investment. The government, on the other hand, saw this as a preferable option than allowing the UK’s banking system to collapse completely. As a result, it appears that the government’s actions were justified, as the alternative scenario would have been disastrous for the entire United Kingdom.

Government Response

Recovery was challenging due to the intricate nature of the banking system that had developed before to the crisis. It meant that regulators had made a serious error in risk and reward policy, which was widespread throughout the UK banking industry. The origins of the crisis are well-known. It’s critical to emphasize how the government’s approach helped the UK weather the credit crunch better than the rest of the EU and the US.

One of the first responses from the government was to ask Northern Rock to lower the size of its loan book. This was in direct opposition to other banks’ desires to continue lending to small businesses and consumers. The main distinction was the emphasis on only lending to borrowers who were less risky. The government treated Northern Rock and other banks’ ‘bad book’ of mortgages differently than ‘regular’ mortgages and new business. This was simply one of many steps taken to put bank reforms in place and successfully deal with the crisis.

Conclusion Government Measures

The UK government implemented a number of policies that would serve as an example for other countries. They would help the UK economy cope with the effects of the global financial crisis. Interest rate management and quantitative easing were among the additional measures used by the government. They also implemented a fiscal boost to try to get the economy back on track. The government imposed requirements on banks receiving public financing in order to ensure that the nationalised banks did not gain a competitive advantage. The UK government’s reaction to the financial crisis was successful, and we are now on the mend from the severe credit crunch.

How did the government react to the financial crisis?

The Reserve Bank of Australia was the first major macroeconomic policy reaction to the global financial crisis in Australia (RBA).

The Board’s paper suggested a significant cut in the cash rate, of at least 50 basis points, with the amount subject to reconsideration in light of any developments that occurred between the time of the document’s preparation and the meeting. In the end, the suggestion made to the Board during the meeting was for a 100-basis-point cut to 6.0 percent.

The Australian Government’s Strategic Policy Budget Committee, which included the Prime Minister, Deputy Prime Minister, Treasurer, and Finance Minister, met on a regular basis throughout this time to discuss economic trends and develop policy.

On the 8th of October, the Treasurer flew to the United States to attend the annual meetings of the International Monetary Fund and the World Bank. While events were unfolding quickly, it was deemed necessary for the Treasurer to have first-hand knowledge of the crisis in the United States while maintaining regular communication with the Prime Minister and his colleagues in Australia.

As the weekend of October 11th and 12th neared, it became evident that the Australian government needed to take decisive steps to protect the economy from the looming worldwide crisis.

The Australian government declared on Sunday, October 12th, that it would guarantee all Australian bank deposits and, for a fee, the wholesale funding of Australia’s banks.

While the Australian banking system was in good shape as of mid-October 2008, Australia’s four largest banking groups were among only ten in the world to be rated AA or higher by Standard & Poor’s the government took steps to ensure financial system stability and secure credit flows to the economy. Despite being in better form than their overseas counterparts, Australian banks were at a competitive disadvantage since other governments had guaranteed their banks’ borrowings. There were also symptoms of deterioration among Australia’s second-tier and smaller banks.

These financial stability initiatives entailed the government taking on risk in order to alleviate consumer and business concerns about the banking industry and the economy as a whole. It was critical that governments calmed the situation by temporarily taking on private sector risk in this extremely volatile and risk-averse climate where there was the possibility for chaotic and irrational behavior.

The second part of the government’s policy response was fiscal action, and I’ll spend the balance of my session discussing this aspect of policy.

The government issued a $10.4 billion stimulus package two days after the financial stability measures were unveiled, which is about 1% of Australia’s GDP. The package included $8.7 billion in cash bonuses for retirees and low-income families, $1.5 billion to promote housing building, and $187 million for new training opportunities.

Before the package was released, the government and its experts had been debating various fiscal policy solutions for some time, and much thought had gone into its composition.

The fiscal package targeted the economy’s weakest sectors, which were consumption and housing at the time. With housing and consumption accounting for more than 60% of the economy, it was considered that supporting these weak sectors was critical.

The program was also timely, targeted, and temporary, which are all hallmarks of sound discretionary fiscal policy.

The housing component of the stimulus package, which included a time-limited subsidy to first-time home purchasers, went into effect right away. Grants to first-time home purchasers were not the first time they had been utilized to boost the economy. When the economy stagnated in the early 2000s, a similar approach was successful in accelerating housing construction activities.

After a period of relatively high mortgage rates and strong migration, the government was also aware of significant pent-up demand for owner-occupied housing. As a result, it recognized that if this policy was withdrawn at the right time and in the right way, it might move activity forward without causing a significant drop in activity when the policy was discontinued.

The stimulus package’s consumption components were likewise planned to be quick-acting, with large cash incentives going to retirees, carers, elders, and low-income households within weeks of the announcement.

These are household groups with a high proclivity for spending money they don’t have. That is, they are more likely than other groups to spend more of any additional money they receive, maximizing the package’s overall stimulus effects.

This package’s consumption component had the extra benefit of delivering much-needed economic assistance to the community’s least fortunate residents.

The government viewed this initial, as it would become, stimulus package as a reasonable response to the rapid deterioration in global conditions in October, even though the probable need for additional stimulus down the road was fully acknowledged.

As a result, the government began planning to accelerate the start of large-scale infrastructure projects in order to prepare for the potential that the global financial crisis may be worse and last longer than expected. Early in December, a $4.7 billion initial tranche of these projects was announced.

Interest rates were aggressively slashed in November and December, and the worldwide reaction to the crisis was stepped up.

On the 15th of November, Prime Minister Kevin Rudd remarked at the first G-20 Leaders Summit about the potential for the financial crisis to harm the real economy, particularly unemployment.

Shortly after the October stimulus package, the Australian government began preparing for the likelihood of a sharp increase in unemployment if the economy slowed.

The unemployment rate soared throughout the early 1980s and 1990s recessions. After peaking at over 10% in the 1990s recession, the unemployment rate took roughly 10 years to fall below 6%, and around 6 years to dip below 6% in the 1980s recession.

Given the increased risk of a recession, the government needed to be prepared to respond with policies that aided the workforce in addition to supporting aggregate demand.

Another key aspect in Australia’s favor in late 2008 was the depreciation of the Australian dollar.

The floating of the Australian dollar in 1983 has proven to be one of Australia’s most significant economic innovations. It has served as a reliable automatic stabilizer, reducing demand in good times and bolstering demand in bad.

Because of the proportional importance of mineral production, it has been extremely advantageous to the Australian economy. Because commodity (mineral) prices have the ability to rise and fall dramatically, changes in the exchange rate have helped to mitigate the consequences of these price swings on the larger economy.

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 steps did the government take in 2009 to combat the Great Recession?

The American Recovery and Reinvestment Act of 2009 (ARRA) was a key vehicle for fiscal stimulus, allowing spending on infrastructure, health care, and education, as well as increasing automatic stabilizers and reducing taxes.