Week 8 Flashcards
What do people usually do when they want to break panics??
They stack up money in their windows
HOw big was the US financial system relative to the economy?
relatively small in the US. GB came first
Was the central banks credibility high?
Yes, the central banks credibility was very high.
What was one the major problems in dealing with the crisis from the FED´s viewpoint?
no authority. no authority to inject capital into banks.The FED could lend money to commercial banks.
What could the FDIC do?
it could insure deposits up to 100k but foreign deposits, repo etc was not included.
How much credit was insured?
Most was left outside of governments control to downsize the panic
What was the overall strategy of the FED?
To risk to do too much instead of too little
When did policy makers let the crisis burn?
August 2007 to March 2008
What did the FED do in the letting it burn phase?
it lowered interest rates aggressively and tried to get liquidity in the banking system by reducing the stigma of te discount window.
What did the FED not do that would have been a good thing to do?
to step in and fincance the securites the market did not want to finance. They also led many smaller banks fail and they led in this period more than two dozen morgage lenders fail.
What did the FED do in the second phase that began in March 2008 and ended in the summer of 2008?
to adress the funding tools also to investment banks.They helped to merge J.P Morgan and Bear Stearns
When did the thrid phase happpen?
September 2008 - January 2009
What happened in the third phase with the economy?
people kept loosing their jobs and morgage prices continued to fall
What did the FED do in the third phase of the crisis?
it expanded liquidity into critical markets into the entire system. Provided additional support to key institutions. Ban of America, Citi Bank and Ban of America.
What did the FED do in September 2008?
Helped encourage the acquisition of a failing investment bank, Merrill Lynch, by a bank, Bank of America, tried but failed to find a buyer for Lehman, leading to its bankruptcy.Acted to prevent the failure of a large global insurance company, AIG, and imposed loses on the creditors of a major bank, WaMu, in the context of facilitating its merger, its acquisition by JP Morgan.
What was one of the main problems that the FED had to face?
It did not have the tools that it needed
what is the difference between a normal crisis and a sytemic one
What seems sensible ina normal crisis can be very dangerous in a sytemic one
When did phase 4 of the crisis begin?
In February 2009
What did secretary Geithner had to tell obama one wek after he tok over?
That despite all these investments, they had to put more money into the system
Who was prevented from failure?
Ber Stearns Fannie and Freddie, AIG, Market Monetary Fund, Wachovia
Whom led they fall?
Indymac, Lehmann, reserve Primary Fund, Washington Mutual
What was bad about the policy of the FED?
There was still much uncertainty, you just could not tell who would be saved and who would not be saved.
Summarise what the FED did in phase 4 of the crisis
Powell doctrine to revive growth - fiscal, monetary, financial. They put a 800 billion fiscal stimulus in. They coordinated global keynesian response. Stress tests to restore confidence. HArdened the guarantees of the system. They also managed that the policies would cover a vast bulk of the financial system.
How muhc confidence was there in the financial system?
Almost no confidence, still
What was stress testing?
So, what we did, is we designed this thing we called the stress test, drawing on some earlier supervisory work. And what we did, is we had the Fed estimate the scale of losses that firms might face in the event of a terrible, much more damaging, much more prolonged recession. And then said we would disclose those losses, that we’d disclose those losses for each individual firm. And we committed to make sure that those firms had more capital, had enough capital to survive losses that large. We’d give them a window to go raise capital from the private markets. And if they were unable to raise that capital successfully, we’d put additional capital in using the emergency resources that Congress had given us.
Why were the stress tests so important?
Because they demonstrated that there was enough capital in the american system to survive. The put enough money in the window.
Was the recovery wuick?
Yes the recovery was really quick
Was the policy of the FED after the crisis of 2008 similar to the one of 1929?
No, not at all, it was the opposite
Did the FED do a lot in the housing market?
By the fall of 2009, how many people had lost tgeir jobs?
9 million
Ho many morgages were under water in 2009?
1 out of 5
What were the three goals of the FED?
Stop the drop in prices, stop wealth from disappearing, 2 Keep morgage rates low and help families to access credit. 3 Provide targeted foreclosure relief
Were they effective in making rates stay low?
Yes.
Did the FED have many tools in the morgage market?
No
What was the FED unable to do in the morgage market?
Discharge homeowner debt in bancruptcy. Create a homeowners loan coporation. Start another morgge refinancing programme.
