Federal Reserve Chairman Ben Bernanke informed Treasury Secretary Henry Paulson on September 17, 2008, that a considerable amount of public money will be required to stabilize the financial sector. On September 19, short trading of 799 financial stocks was outlawed. Large short positions were also required to be disclosed by companies. The Treasury Secretary also stated that money market funds would form an insurance pool to protect themselves against losses, and that the government would purchase mortgage-backed assets from banks and investment firms. As of September 19, 2008, initial estimates of the cost of the Treasury bailout suggested by the Bush Administration’s draft legislation ranged from $700 billion to $1 trillion US dollars. On September 20, 2008, President George W. Bush requested authorization from Congress to spend up to $700 billion to purchase distressed mortgage assets and stem the financial crisis. The crisis worsened when the bill was rejected by the US House of Representatives, resulting in a 777-point drop in the Dow Jones. Despite the fact that Congress enacted a revised version of the plan, the stock market continued to tumble. Instead of distressed mortgage assets, the first half of the bailout money was utilized to acquire preferred shares in banks. This contradicted some economists’ claims that purchasing preferred shares is considerably less effective than purchasing regular stock.
The new loans, purchases, and liabilities of the Federal Reserve, Treasury, and FDIC, as of mid-November 2008, were estimated to total over $5 trillion: $1 trillion in loans to broker-dealers through the emergency discount window, $1.8 trillion in loans through the Term Auction Facility, $700 billion to be raised by the Treasury for the Troubled Assets Relief Program, and $200 billion in insurance for the GSEs.
As of March 2018, ProPublica’s “bailout tracker” showed that $626 billion had been “spent, invested, or loaned” in financial system bailouts as a result of the crisis, with $713 billion repaid to the government ($390 billion in principal repayments and $323 billion in interest), indicating that the bailouts generated $87 billion in profit.
What Caused the Recession of 2008?
What’s the bottom line? Banks were overly reliant on derivatives. To keep the supply of derivatives flowing, they sold far too many bad mortgages. The underlying reason of the recession was this. This financial disaster swiftly expanded beyond the housing market and into the banking system, bringing down financial behemoths in the process. Lehman Brothers and Merrill Lynch were among those judged “too big to fail.” As a result, the problem spread over the world.
When the financial crisis hit in 2008, who was the president?
Barack Obama was elected by the American people in 2008 to lead the country through the biggest economic crisis since the Great Depression.
Which president brought the Great Recession to an end?
Today is a fantastic day to be in Ohio. It was here that I spent six of the most formative years of my life. In Canton, I attended junior high and high school. However, my father was relocated shortly after I finished, and I haven’t had the opportunity to visit in many years. So, for me, this is a walk down memory lane. Indeed, I’ll be travelling to Canton tonight and returning to my high school the next day.
Ohio is not only important in my past; it is also important in my present. States like Ohio, Michigan, and California, where I now live, have been hit particularly hard by the financial crisis. These and other states have been hit the hardest by the Great Recession. Since the beginning of the recession, Ohio has lost almost 400,000 jobs, with an unemployment rate of 11%. I wanted to come here to discuss the Administration’s policies and aims, as well as to learn firsthand about the state of the local economy.
In my remarks this morning, I’d like to talk about the steps taken to end the recession as well as my assessment of how the economy is going. I’d like to talk about both the tangible progress that has been made and what more needs to be done to accelerate recovery.
I’d also like to discuss the significance of finance regulation reform for states such as Ohio. Our financial system’s new rules of the road are currently being written by Congress. I’d like to talk about the most important aspects of change and why they matter so much to each of us.
Treating the Recession
President Barack Obama took office in the midst of the greatest economic downturn since the Great Depression. I recall the conclusion of my first week of transitioning vividly. I was called out of a meeting on Friday, December 5th, 2008, to give the President-Elect a phone briefing on the November employment figures. It was evident that what had appeared to be a normal recession only a few months before had taken on alarming proportions. On that day, we discovered that almost half a million jobs had been lost in November. I found myself saying to myself, “I’m sorry, Mr. President-Elect, but the figures are just terrible.” He responded, “It isn’t your faultat least not yet.”
Other countries began to report astonishing reductions in output and employment in January and February of last year. Any notion that the rest of the world’s growth would help to offset the United States’ decline was crushed. We were clearly in the midst of a global contraction unlike anything we’d seen in more than a generation. Between November and March, the United States lost about 3 million jobs.
Clearly, the bursting of the housing bubble and the accompanying financial crisis were the primary causes of the recession. Trillions of dollars in personal wealth were destroyed in a couple of months, causing a sharp drop in consumer spending. Credit spreads soared and critical sources of credit dried up as a result of the bankruptcy of Lehman Brothers and the subsequent runs on money market mutual funds and other financial institutions. The Federal Reserve and the Treasury took swift action in the fall of 2008 to prevent a full-fledged panic, but stock prices continued to plummet and lending standards tightened rapidly into the following winter. The entire financial system was teetering on the brink of collapse.
President Obama recognized that this was a full-fledged catastrophe that demanded a full-fledged governmental response. Within its first few months, the Administration took numerous key steps in collaboration with Congress.
The American Recovery and Reinvestment Act, for example, was passed. The American Recovery and Reinvestment Act was the most aggressive countercyclical fiscal stimulus in history. It comprised $787 billion in tax cuts and spending, with around one-third of the total going to tax cuts, one-third to government investments, and one-third to relief to those most affected by the recession and distressed state and local governments. Over $200 billion in tax cuts and relief payments, like as unemployment insurance, have already been distributed to American people. Thousands of investment projects, ranging from roads and bridges to a better electrical system and clean energy production, are currently underway.
To assist restore the financial system, the Administration collaborated with the Federal Reserve and the FDIC. The stress test, which provided a complete assessment of the health of the 19 largest financial institutions, was perhaps the most crucial measure. The government’s promise to replace any detected capital deficits that the institutions couldn’t complete by raising private capital, combined with the meticulous cleaning of the records, helped to restore confidence in the financial sector. It also resulted in a surge of private capital raising, putting our financial institutions on far more solid ground. Credit spreads narrowed significantly, and stock values soared.
In addition, the administration tried to stabilize the housing market and reduce the number of foreclosures. The Treasury collaborated with the Federal Reserve to lower mortgage interest rates, lowering payments for millions of Americans who refinanced their houses. We also established a program to assist responsible homeowners facing foreclosure in lowering their monthly mortgage payments. More than a million homes have already received trial modifications, and we’re trying to strengthen the program so that more problematic homeowners are eligible and that more trial modifications become permanent.
The actions of the Federal Reserve were supplemented by these policy actions. The policy interest rate was soon cut to practically zero by monetary officials. To further lower longer-term interest rates, they made large-scale purchases of government bonds and mortgage-backed securities. They also developed programs that successfully resurrected some of the securitized financing that had dried up in the aftermath of the financial crisis.
This comprehensive policy response has made a significant difference. We learnt on Friday that real GDP, a measure of the total amount of goods and services we generate, increased for the third quarter in a row. The first quarter of 2010 saw yearly growth of 3.2 percent, which is a significant improvement over the 6.4 percent decline in the first quarter of 2009. Similarly, we resumed job creation in March. Employment increased by 160,000, and given the other data, we anticipate another positive reading in the April employment report on Friday.
Now, we all understand that the economy has a long way to go. The recession’s loss of output and jobs was so severe that it will take several quarters of strong growth and job creation to bring the economy back to full health and employment. However, we are undeniably on the right track. And the policy reaction is a significant reason we’ve been able to get back on track.
Congress mandated that the Council of Economic Advisers report on the Recovery Act’s economic impact every quarter. We take this obligation very seriously. We’ve spent the last year analyzing the impact of the Act’s different components, such as state fiscal relief, renewable energy mandates, tax cuts, and income-support payments. Each in-depth investigation has revealed significant effects on employment creation and growth.
According to our most recent analysis, the Recovery Act has preserved or produced almost 21/2 million jobs. That means 21/2 million individuals are now employed who would not have been if the Act had not been passed. Our projections are close to those of private forecasters and the neutral Congressional Budget Office, and are based on two separate techniques. They’re also in line with the statistics from direct recipients. Each quarter, recipients of around 15% of Recovery Act monies submit a form detailing the number of jobs created as a result of the Act. According to the most recent reports for this small portion of Recovery Act financing, nearly 700,000 jobs were directly sponsored.
However, our general job estimates and aggregate economic indicators may not be the best method to see the impact of the Recovery Act. It’s to assess what it’s doing on the ground in states such as Ohio.
Ohio has received nearly $2 billion in state fiscal assistance as a result of the Act. Thousands of teacher positions have been protected as a result of this support, and the state has been able to deal with the catastrophic effects of the recession on its budget without having to raise taxes significantly. The Act also provides funding for over 400 transportation projects in Ohio as well as over 2000 loans to small companies in the state. This is boosting job creation and long-term public and private investments, which are helping to turn around Ohio’s economy and make it stronger in the future.
Moreover, the Act has provided $21/2 billion in tax relief to 41/2 million Ohio working families, another $21/2 billion in assistance to nearly a million unemployed workers and others on the front lines of the recession, and half a billion dollars in one-time payments to 2 million Ohio seniors and veterans. This tax relief and income support is assisting families in more ways than one. It supports demand by providing money in people’s pockets, making the recession less severe and the recovery stronger than it would be without.
Where Are We Now and What More Needs to Be Done?
The economy is clearly improved as a result of our actionsthe treatment is working. However, we must be realistic about the significant problems that remain. With a 9.7% unemployment rate, it is apparent that, while the economy is improving, it is not yet fully recovered.
Fundamentally, the economy continues to be deficient in demand. Consumers and businesses stop buying during recessions for a variety of reasons, including a financial crisis or a decrease in wealth. As a result of the drop in demand, producers reduce production and lay off people. The resulting unemployment cuts demand even more.
When expenditure starts to recover, it is called a recovery. And that is precisely what has been taking place. Consumer spending was up sharply, while businesses were investing more in equipment and software, according to the GDP report released last Friday.
Even though demand is increasing again, it is still lower than it was when the recession began, and significantly lower than it would have been if we had expanded regularly over the previous two years. According to the Congressional Budget Office, demand (and thus output) is at least 6% below its trend path.
The GDP report released on Friday revealed the source of some of the demand shortfall. For example, while company investment in equipment and software is increasing again, it began at a painfully low level and remains so in absolute terms. And business investment in structures, such as factories, office buildings, and retail malls, continues to decline. Similarly, consumers are spending more, but house building is still modest, having dropped in the first quarter. As a result, a key historic source of demand and employment stays dormant.
Finally, state and local governments are cutting back on expenditure at the same time that the federal government is raising demand. Governments are being compelled to cut back on key services as a result of the recession’s destructive impact on state and local finances. Over the next two fiscal years, state and local governments are expected to face a $300 billion budget gap. If these shortages are filled through tax hikes, the impact on consumer spending might be significant. The impact on education and public safety could be disastrous if they are closed by laying off teachers and first responders, as numerous reports say is inevitable.
The current very high unemployment rate is a direct result of a demand shortfall. Because of structural changes or because workers aren’t looking for work, unemployment is low. It’s high because we’re not producing at even close to normal levels.
All of this means that governments must continue to take initiatives to assist in the generation of private demand and growth. It is insufficient that output and employment increase. We need to encourage robust growth in order to accelerate the recovery of output and employment to pre-recession levels. That is why President Obama has been working with Congress to approve a plan to help small businesses create jobs. A lending fund is one of the most important components of this package, as it will assist small firms in obtaining the finance they require to expand. Another provision exempts persons who invest in small firms from paying capital gains taxes.
In addition, the President is continuing to work with Congress to accelerate the transition to renewable energy. The clean energy manufacturing tax credit, one of the Recovery Act’s programs, has been particularly successful in helping American companies establish themselves as makers of sustainable energy items like wind turbines and solar panels. This event was massively overcrowded. More investments in this area would be beneficial to employment growth and the economy’s long-term health.
More funding for state and municipal governments would be extremely beneficial. One of the most difficult obstacles facing the US economy on the road to recovery is the poor status of state and municipal finances. One of the most effective ways we can support families, communities, and local businesses is to raise funding to retain teachers in the classroom and preserve important services.
The further activities we’re discussing are really focused. We looked for programs that provided the most bang for the buck. We’re all well aware of our significant long-term fiscal issues and the necessity to get our fiscal house in order. As the economy improves, the President is adamant about addressing the budget deficit.
However, it would be stupid to try to solve our long-term problem by immediately tightening fiscal policy or avoiding extra emergency spending to reduce unemployment. Immediate fiscal contraction will eventually suffocate the nascent economic recovery, just as fiscal and monetary contraction in 1936 and 1937 triggered a second severe recession before the Great Depression was fully recovered. Nothing would be more harmful to our fiscal future than a prolonged recession that resulted in more unemployment for the foreseeable future. Today’s responsible, targeted efforts that aid the private sector’s stronger recovery are the best policy for both people and the economy’s long-term health.
Conclusion
This year, I’ve utilized a lot of medical analogies. When the economy has been as bad as it has been, I believe it’s only natural. I gave a speech about the diagnosis and therapy of our economic woes about this time last year. I delivered a talk last fall about how close we came to disasterI guess you could call it a description of our near-death experience.
In assessing the economy this year, I had the impression of a doctor looking at a terminally ill patient with a renewed sense of hope. To be true, the patient is weakbut she is improving. The economy will be able to recover. This means that our short-term focus can move from crisis management to doing all possible to speed up the healing process.
It also signifies that it’s past time to start planning for the future. We must not only do our best to speed our recovery, but we must also adopt significant lifestyle adjustments that will keep us healthy in the future, just as a patient recovering from a heart attack must. The agony of the past two years has demonstrated how devastating the consequences of a financial crisis can be. To avoid a repeat, we need to put in place sound financial regulatory reform. We must apply what we’ve learned to build a stronger and more secure financial system, as well as a brighter future for all of us.
During the 2007 recession, who was president?
Significant income tax cuts in 2001 and 2003, the implementation of Medicare Part D in 2003, increased military spending for two wars, a housing bubble that contributed to the subprime mortgage crisis of 20072008, and the Great Recession that followed were all hallmarks of George W. Bush’s economic policy. Two recessions, in 2001 and 20072009, had a negative impact on the economy during this time period.
What led to the global financial crisis of 2008 and 2009?
The Great Recession, which ran from December 2007 to June 2009, was one of the worst economic downturns in US history. The economic crisis was precipitated by the collapse of the housing market, which was fueled by low interest rates, cheap lending, poor regulation, and hazardous subprime mortgages.
Was it a depression or a recession in 2008?
- The Great Recession was a period of economic slump that lasted from 2007 to 2009, following the bursting of the housing bubble in the United States and the worldwide financial crisis.
- The Great Recession was the worst economic downturn in the United States since the 1930s’ Great Depression.
- Federal authorities unleashed unprecedented fiscal, monetary, and regulatory policy in reaction to the Great Recession, which some, but not all, credit with the ensuing recovery.
When the housing market crashed, who was the president?
The housing bubble in the United States was a real estate bubble that affected more than half of the country’s states. The subprime mortgage crisis was sparked by it. Housing prices peaked in early 2006, began to fall in 2006 and 2007, and then fell to new lows in 2012. The CaseShiller home price index showed its greatest price decrease in history on December 30, 2008. The credit crisis that resulted from the bursting of the housing bubble was a major contributor to the United States’ Great Recession.
Increased foreclosure rates among U.S. homeowners in 20062007 triggered a subprime, Alt-A, collateralized debt obligation (CDO), mortgage, credit, hedge fund, and foreign bank market crisis in August 2008. The bursting housing bubble was dubbed “the greatest important risk to our economy” by the US Secretary of the Treasury in October 2007.
Any burst of the housing bubble in the United States has a direct influence on mortgage markets, home builders, real estate, home supply retail stores, Wall Street hedge funds controlled by major institutional investors, and foreign banks, raising the possibility of a nationwide recession. President George W. Bush and Federal Reserve Chairman Ben Bernanke announced a limited rescue of the US housing market for homeowners who were unable to pay their mortgage bills due to concerns about the impact of the collapsing property and credit markets on the greater US economy.
The US government set aside about $900 billion in special loans and bailouts connected to the housing bubble in 2022 alone.
This was split evenly between the public and private sectors.
Because of their large market share, government-sponsored enterprises such as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), as well as the Federal Housing Administration, received a significant share of government support, despite the fact that their mortgages were more conservatively underwritten and performed better than those in the private sector.
George W. Bush was a Democrat, right?
George W. Bush’s presidency as the 43rd president of the United States began on January 20, 2001, with his first inauguration, and ended on January 20, 2009. Bush, a Texas Republican, was elected president after a close victory over Democratic Vice President Al Gore in the 2000 presidential election. He was re-elected four years later, defeating Democrat opponent John Kerry in the 2004 presidential election. Bush was followed by Barack Obama, a Democrat who won the presidential election in 2008. Bush, the 43rd president, is the eldest son of George H. W. Bush, the 41st president.
The terrorist events on September 11, 2001, were a watershed moment in his presidency. Congress established the Department of Homeland Security as a result of the attack, and Bush declared a global war on terrorism. He ordered an invasion of Afghanistan in order to depose the Taliban, destroy al-Qaeda, and apprehend Osama bin Laden. He also signed the controversial Patriot Act, which allows the government to spy on suspected terrorists. Bush launched the invasion of Iraq in 2003, claiming that Saddam Hussein’s regime had weapons of mass destruction. When no WMD stockpiles or evidence of an operational affiliation with al-Qaeda were ever discovered, there was outrage. Bush had pushed through a $1.3 trillion tax cut package as well as the No Child Left Behind Act, a major education bill, prior to 9/11. He also supported socially conservative policies like the Partial-Birth Abortion Ban Act and faith-based welfare programs. He also signed the Medicare Prescription Drug, Improvement, and Modernization Act, which established Medicare Part D, in 2003.
Bush achieved a number of free trade deals during his second term and selected John Roberts and Samuel Alito to the Supreme Court. He attempted to make significant reforms to Social Security and immigration legislation, but both failed. The battles in Afghanistan and Iraq continued, and he sent more soldiers to Iraq in 2007. The Bush administration’s response to Hurricane Katrina and the scandal surrounding the dismissal of US attorneys were both criticized, resulting in a dip in Bush’s approval ratings. As policymakers sought to avoid a catastrophic economic calamity, a worldwide financial market crisis dominated his final days in office, and he formed the Troubled Asset Relief Program (TARP) to buy toxic assets from banking institutions.
Why did the economy collapse in 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.
When did the United States recover from the Great Recession of 2008?
When the decade-long expansion in US housing market activity peaked in 2006, the Great Moderation came to an end, and residential development began to decline. Losses on mortgage-related financial assets began to burden global financial markets in 2007, and the US economy entered a recession in December 2007. Several prominent financial firms were in financial difficulties that year, and several financial markets were undergoing substantial upheaval. The Federal Reserve responded by providing liquidity and support through a variety of measures aimed at improving the functioning of financial markets and institutions and, as a result, limiting the damage to the US economy. 1 Nonetheless, the economic downturn deteriorated in the fall of 2008, eventually becoming severe and long enough to be dubbed “the Great Recession.” While the US economy reached bottom in the middle of 2009, the recovery in the years that followed was exceptionally slow in certain ways. In response to the severity of the downturn and the slow pace of recovery that followed, the Federal Reserve provided unprecedented monetary accommodation. Furthermore, the financial crisis prompted a slew of important banking and financial regulation reforms, as well as congressional legislation that had a substantial impact on the Federal Reserve.
Rise and Fall of the Housing Market
Following a long period of expansion in US house building, home prices, and housing loans, the recession and crisis struck. This boom began in the 1990s and accelerated in the mid-2000s, continuing unabated through the 2001 recession. Between 1998 and 2006, average home prices in the United States more than doubled, the largest increase in US history, with even bigger advances in other locations. During this time, home ownership increased from 64 percent in 1994 to 69 percent in 2005, while residential investment increased from around 4.5 percent of US GDP to nearly 6.5 percent. Employment in housing-related sectors contributed for almost 40% of net private sector job creation between 2001 and 2005.
The development of the housing market was accompanied by an increase in household mortgage borrowing in the United States. Household debt in the United States increased from 61 percent of GDP in 1998 to 97 percent in 2006. The rise in home mortgage debt appears to have been fueled by a number of causes. The Federal Open Market Committee (FOMC) maintained a low federal funds rate after the 2001 recession, and some observers believe that by keeping interest rates low for a “long period” and only gradually increasing them after 2004, the Federal Reserve contributed to the expansion of housing market activity (Taylor 2007). Other researchers, on the other hand, believe that such variables can only explain for a small part of the rise in housing activity (Bernanke 2010). Furthermore, historically low interest rates may have been influenced by significant savings accumulations in some developing market economies, which acted to keep interest rates low globally (Bernanke 2005). Others attribute the surge in borrowing to the expansion of the mortgage-backed securities market. Borrowers who were deemed a bad credit risk in the past, maybe due to a poor credit history or an unwillingness to make a big down payment, found it difficult to get mortgages. However, during the early and mid-2000s, lenders offered high-risk, or “subprime,” mortgages, which were bundled into securities. As a result, there was a significant increase in access to housing financing, which helped to drive the ensuing surge in demand that drove up home prices across the country.
Effects on the Financial Sector
The extent to which home prices might eventually fall became a significant question for the pricing of mortgage-related securities after they peaked in early 2007, according to the Federal Housing Finance Agency House Price Index, because large declines in home prices were viewed as likely to lead to an increase in mortgage defaults and higher losses to holders of such securities. Large, nationwide drops in home prices were uncommon in US historical data, but the run-up in home prices was unique in terms of magnitude and extent. Between the first quarter of 2007 and the second quarter of 2011, property values declined by more than a fifth on average across the country. As financial market participants faced significant uncertainty regarding the frequency of losses on mortgage-related assets, this drop in home values contributed to the financial crisis of 2007-08. Money market investors became concerned of subprime mortgage exposures in August 2007, putting pressure on certain financial markets, particularly the market for asset-backed commercial paper (Covitz, Liang, and Suarez 2009). The investment bank Bear Stearns was bought by JPMorgan Chase with the help of the Federal Reserve in the spring of 2008. Lehman Brothers declared bankruptcy in September, and the Federal Reserve aided AIG, a significant insurance and financial services firm, the next day. The Federal Reserve, the Treasury, and the Federal Deposit Insurance Corporation were all approached by Citigroup and Bank of America for assistance.
The Federal Reserve’s assistance to specific financial firms was hardly the only instance of central bank credit expansion in reaction to the crisis. The Federal Reserve also launched a slew of new lending programs to help a variety of financial institutions and markets. A credit facility for “primary dealers,” the broker-dealers that act as counterparties to the Fed’s open market operations, as well as lending programs for money market mutual funds and the commercial paper market, were among them. The Term Asset-Backed Securities Loan Facility (TALF), which was launched in collaboration with the US Department of Treasury, was aimed to relieve credit conditions for families and enterprises by offering credit to US holders of high-quality asset-backed securities.
To avoid an increase in bank reserves that would drive the federal funds rate below its objective as banks attempted to lend out their excess reserves, the Federal Reserve initially funded the expansion of Federal Reserve credit by selling Treasury securities. The Federal Reserve, on the other hand, got the right to pay banks interest on their excess reserves in October 2008. This encouraged banks to keep their reserves rather than lending them out, reducing the need for the Federal Reserve to offset its increased lending with asset reductions.2
Effects on the Broader Economy
The housing industry was at the forefront of not only the financial crisis, but also the broader economic downturn. Residential construction jobs peaked in 2006, as did residential investment. The total economy peaked in December 2007, the start of the recession, according to the National Bureau of Economic Research. The drop in general economic activity was slow at first, but it accelerated in the fall of 2008 when financial market stress reached a peak. The US GDP plummeted by 4.3 percent from peak to trough, making this the greatest recession since World War II. It was also the most time-consuming, spanning eighteen months. From less than 5% to 10%, the jobless rate has more than doubled.
The FOMC cut its federal funds rate objective from 4.5 percent at the end of 2007 to 2 percent at the start of September 2008 in response to worsening economic conditions. The FOMC hastened its interest rate decreases as the financial crisis and economic contraction worsened in the fall of 2008, bringing the rate to its effective floor a target range of 0 to 25 basis points by the end of the year. The Federal Reserve also launched the first of several large-scale asset purchase (LSAP) programs in November 2008, purchasing mortgage-backed assets and longer-term Treasury securities. These purchases were made with the goal of lowering long-term interest rates and improving financial conditions in general, hence boosting economic activity (Bernanke 2012).
Although the recession ended in June 2009, the economy remained poor. Economic growth was relatively mild in the first four years of the recovery, averaging around 2%, and unemployment, particularly long-term unemployment, remained at historically high levels. In the face of this sustained weakness, the Federal Reserve kept the federal funds rate goal at an unusually low level and looked for new measures to provide extra monetary accommodation. Additional LSAP programs, often known as quantitative easing, or QE, were among them. In its public pronouncements, the FOMC began conveying its goals for future policy settings more fully, including the situations in which very low interest rates were likely to be appropriate. For example, the committee stated in December 2012 that exceptionally low interest rates would likely remain appropriate at least as long as the unemployment rate remained above a threshold of 6.5 percent and inflation remained no more than a half percentage point above the committee’s longer-run goal of 2 percent. This “forward guidance” technique was meant to persuade the public that interest rates would remain low at least until specific economic conditions were met, exerting downward pressure on longer-term rates.
Effects on Financial Regulation
When the financial market upheaval calmed, the focus naturally shifted to financial sector changes, including supervision and regulation, in order to avoid such events in the future. To lessen the risk of financial difficulty, a number of solutions have been proposed or implemented. The amount of needed capital for traditional banks has increased significantly, with bigger increases for so-called “systemically essential” institutions (Bank for International Settlements 2011a;2011b). For the first time, liquidity criteria will legally limit the amount of maturity transformation that banks can perform (Bank for International Settlements 2013). As conditions worsen, regular stress testing will help both banks and regulators recognize risks and will require banks to spend earnings to create capital rather than pay dividends (Board of Governors 2011).
New provisions for the treatment of large financial institutions were included in the Dodd-Frank Act of 2010. The Financial Stability Oversight Council, for example, has the authority to classify unconventional credit intermediaries as “Systemically Important Financial Institutions” (SIFIs), putting them under Federal Reserve supervision. The act also established the Orderly Liquidation Authority (OLA), which authorizes the Federal Deposit Insurance Corporation to wind down specific institutions if their failure would pose a significant risk to the financial system. Another section of the legislation mandates that large financial institutions develop “living wills,” which are detailed plans outlining how the institution could be resolved under US bankruptcy law without endangering the financial system or requiring government assistance.
The financial crisis of 2008 and the accompanying recession, like the Great Depression of the 1930s and the Great Inflation of the 1970s, are important areas of research for economists and policymakers. While it may be years before the causes and ramifications of these events are fully known, the attempt to unravel them provides a valuable opportunity for the Federal Reserve and other agencies to acquire lessons that can be used to shape future policy.