financial crisis essay in english

Financial Crisis

• The Financial Crisis
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Articles and Papers

Monetary Policy and the Crisis

Historical perspectives on the crisis, what caused the crisis, the role of subprime mortgages.

• Possible Solutions

Financial Crisis Articles & Papers: All Topics

The articles and papers listed here cover aspects of the financial crisis and represent a range of opinions and analysis. The Federal Reserve Bank of St. Louis does not endorse the views presented in these articles or papers.

The Crisis: An Overview

The "Surprising" Origin and Nature of Financial Crises: A Macroeconomic Policy Proposal by Ricardo J. Caballero and Pablo Kurlat in Federal Reserve Bank of Kansas City Symposium , August 2009

The authors discuss three key ingredients for severe finanical crises in developed financial markets. Then they offer a policy proposal of tradable insurance credits to address a systemic crisis.

Bank Lending During the Financial Crisis of 2008 by Victoria Ivashina and David Scharfstein in SSRN , December 2008

This paper documents that new loans to large borrowers fell by 37% during the peak period of the financial crisis (September-November 2008) relative to the prior three-month period and by 68% relative to the peak of the credit boom (Mar-May 2007). New lending for real investment (such as capital expenditures) fell to the same extent as new lendi...  

The Commercial Paper Market, the Fed, and the 2007-2009 Financial Crisis by Richard G. Anderson and Charles S. Gascon in Federal Reserve Bank of St. Louis Review , November 2009

Since its inception in the early nineteenth century, the U.S. commercial paper market has grown to become a key source of short-term funding for major businesses, with issuance averaging over $100 billion per day. In the fall of 2008, the commercial paper market achieved national prominence when increasing market stress caused some to fear that,...  

The Credit Crunch of 2007-2008: A Discussion of the Background, Market Reactions, and Policy Responses by Paul Mizen in Federal Reserve Bank of St. Louis Review , September 2008

This paper discusses the events surrounding the 2007-08 credit crunch. It highlights the period of exceptional macrostability, the global savings glut, and financial innovation in mortgage-backed securities as the precursors to the crisis. The credit crunch itself occurred when house prices fell and subprime mortgage defaults increased. These event...  

The Crisis: Basic Mechanisms, and Appropriate Policies by Olivier J. Blanchard in IMF Working Ppaer , April 2009

The purpose of this lecture is to look beyond the complex events that characterize the global financial and economic crisis, identify the basic mechanisms, and infer the policies needed to resolve the current crisis, as well as the policies needed to reduce the probability of similar events in the future.

Deciphering the Liquidity and Credit Crunch 2007-08 by Markus K. Brunnermeier in Journal of Economic Perspectives , November 2008

This paper summarizes and explains the main events of the liquidity and credit crunch in 2007-08. Starting with the trends leading up to the crisis, Brunnermeier explains how these events unfolded and how four different amplification mechanisms magnified losses in the mortgage market into large dislocations and turmoil in financial markets.

Economic Recovery and Balance Sheet Normalization by Narayana R. Kocherlakota in Federal Reserve Bank of Minneapolis , April 2010

Speech before the Minnesota Chamber of Commerce

The Economics of Bank Restructuring: Understanding the Options by Augustin Landier and Kenichi Ueda in IMF Staff Position Note , June 2009

Based on a simple framework, this note clarifies the economics behind bank restructuring and evaluates various restructuring options for systemically important banks. The note assumes that the government aims to reduce the probability of a bank’s default and keep the burden on taxpayers at a minimum. The note also acknowledges that the design of...  

Factors Affecting Efforts to Limit Payments to AIG Counterparties by Thomas C. Baxter Jr. in Federal Reserve Bank of New York , February 2010

Testimony before the Committee on Government Oversight and Reform, U.S. House of Representatives

Facts and Myths about the Financial Crisis of 2008 by V. V. Chari, Lawrence Christiano and Patrick J. Kehoe in Federal Reserve Bank of Minneapolis Working Paper , October 2008

This paper examines three claims about the way the financial crisis is affecting the economy as a whole and argues that all three claims are myths. It also presents three underappreciated facts about how the financial system intermediates funds between households and corporate businesses.

The Federal Reserve Bank of New York's Involvement with AIG by Thomas C. Baxter and Sarah J. Dahlgren in Federal Reserve Bank of New York , May 2010

Joint written testimony of Thomas C. Baxter and Sarah Dahlgren before the Congressional Oversight Panel, Washington, D.C.

The Federal Reserve's Balance Sheet by Ben S. Bernanke in Speech , April 2009

The Federal Reserve has taken a number of aggressive and creative policy actions, many of which are reflected in the size and composition of the Fed's balance sheet. Bernanke provides a brief guided tour of the Federal Reserve's balance sheet as an instructive way to discuss the Fed's policy strategy and some related issues.

The Financial Crisis: Toward an Explanation and Policy Response by Aaron Steelman and John A.Weinberg in Federal Reserve Bank of Richmond Annual Report 2008 , April 2009

The essay is divided into the four sections. First, what has happened in the financial markets. Second, why those events took place. Third, possible market imperfections that could produce turmoil in the financial markets and an assessment of the role they have played in this case. And, fourth, how policymakers should respond in these difficult and...  

Financial Turmoil and the Economy by Frederick Furlong and Simon Kwan in Federal Reserve Bank of San Francisco Annual Report 2008 , May 2009

An overview of the financial crisis.

The Global Recession by Craig P. Aubuchon and David C. Wheelock in Federal Reserve Bank of St. Louis Economic Synopses , May 2009

Presents information on the percentage of economies around the world that are in recession, and offers comparisons with previous economic declines.

The Global Roots of the Current Financial Crisis and its Implications for Regulations by Anil K. Kashyap, Raghuram Rajan and Jeremy Stein in 5th ECB Central Banking Conference , November 2008

Where did the current financial crisis come from? Who or what is to blame? How will it be resolved? How do we undertake reforms for the future? These are the questions this paper will seek to answer. The analysis will have three parts. The first is a rough and ready sketch of the global roots of this crisis. Second, the authors focus in a more d...  

Interest on Excess Reserves as a Monetary Policy Instrument: The Experience of Foreign Central Banks by David Bowman, Etienne Gagnon, and Mike Leahy in Board of Governors International Finance Discussion Papers , March 2010

This paper reviews the experience of eight major foreign central banks with policy interest rates comparable to the interest rate on excess reserves paid by the Federal Reserve. We pursue two main lines of inquiry: 1) To what extent have these policy interest rates been lower bounds for short-term market rates, and 2) to what extent has tighteni...  

Lending Standards in Mortgage Markets by Carlos Garriga, in Federal Reserve Bank of St. Louis Economic Synopses , May 2009

Examines the mortgage denial rates by loan type as an indicator of loose lending standards.

Lessons Learned from the Financial Crisis by William C. Dudley in Speech , June 2009

In assessing the lessons of the past two years, Dudley focuses on five broad themes that are interrelated: Interconnectedness of the financial system; System dynamics—How does the system respond to shocks?; Incentives—Can we improve outcomes by changing incentives?; Transparency; How should central banks respond to asset bubbles?

Liquidity Risk, Credit Risk, and the Federal Reserve’s Responses to the Crisis by Asani Sarkar in Federal Reserve Bank of New York Staff Reports , September 2009

In responding to the severity and broad scope of the financial crisis that began in 2007, the Federal Reserve has made aggressive use of both traditional monetary policy instruments and innovative tools in an effort to provide liquidity. In this paper, the author examines the Fed’s actions in light of the underlying financial amplification mechanis...  

Looking Behind the Aggregates: A Reply to "Facts and Myths about the Financial Crisis of 2008" by Ethan Cohen-Cole, Burcu Duygan-Bump, Jose Fillat and Judit Montoriol-Garriga in Federal Reserve Bank of Boston Working Paper , November 2008

In reply to the FRB of Minneapolis article by Chari et al. (2008) the authors of this paper argue that to evaluate the four common claims about the impact of financial sector phenomena on the economy, (which the FRB Boston authors conclude are all myths), one needs to look at the underlying composition of financial aggregates. This article find ...  

A Minsky Meltdown: Lessons for Central Bankers by Janet Yellen in FRBSF Economic Letter , May 2009

In this essay, Federal Reserve Bank of San Francisco President Yellen reconsiders the notion of a 'Minsky Meltdown' and suggests that it is time to reconsider the notion that a central bank can not intervene in bubbles. Yellen also outlines her thoughts on supervisory and regulatory policies going forward, and the importance of varying capital req...  

Overview: Global Financial Crisis Spurs Unprecedented Policy Actions by Ingo Fender and Jacob Gyntelberg in BIS Quarterly Review , December 2008

A four-stage overview of the crisis. Market developments over the period under review went through four more or less distinct stages. Stage one, which led into the Lehman bankruptcy in mid-September, was marked by the takeover of two major US housing finance agencies by the authorities in the United States. Stage two encompassed the immediate impl...  

The Panic of 2007 by Gary B. Gorton in Federal Reserve Bank of Kansas City's Symposium: Maintaining Stability in a Changing Financial System , October 2008

How did problems with subprime mortgages result in a systemic crisis, a panic? The ongoing Panic of 2007 is due to a loss of information about the location and size of risks of loss due to default on a number of interlinked securities, special purpose vehicles, and derivatives, all related to subprime mortgages. Subprime mortgages are a financial...  

Preparing for a Smooth (Eventual) Exit by Brian P. Sack in Federal Reseve Bank of New York , March 2010

Remarks at the National Association for Business Economics Policy Conference, Arlington, Virginia

Putting the Financial Crisis and Lending Activity in a Broader Context by Kevin L. Kliesen in Federal Reserve Bank of St. Louis Economic Synopses , February 2009

This paper discusses how banks typically tighten credit standards and/or loan terms as the economy weakens and nonperforming loans increase. But an adverse shock from outside the financial sector can be just as important—such as a sharp increase in oil prices or a plunge in house prices.

The Response of the Federal Reserve to the Recent Banking and Financial Crisis by Randall S. Kroszner and William Melick in Chicago Booth School of Business Working Paper , December 2009

The authors present an account of the policy actions taken by the Fed, providing a narrative that brings together information that otherwise requires consulting a variety of sources. They also present a framework for thinking about the central bank policy response that gives the reader a means of organizing her own understanding of the response. A...  

The Role of Liquidity in Financial Crises by Franklin Allen and Elena Carletti in Federal Reserve Bank of Kansas City's Symposium: Maintaining Stability in a Changing Financial System , September 2008

The purpose of this paper is to use insights from the academic literature on crises to understand the role of liquidity in the current crisis. Allen and Carletti focus on four of the crucial features of the crisis that they argue are related to liquidity provision. The first is the fall of the prices of AAA-rated tranches of securitized products be...  

Speculative Bubbles and Financial Crisis by Pengfei Wang and Yi Wen in Federal Reserve Bank of St. Louis Working Paper , July 2009

Why are asset prices so much more volatile and so often detached from their fundamental values? Why does the bursting of financial bubbles depress the real economy? This paper addresses these questions by constructing an in?nite-horizon heterogeneous agent general equilibrium model with speculative bubbles. We characterize conditions under which st...  

The Supervisory Capital Assessment Program--One Year Later by Ben S. Bernanke in Speech , May 2010

At the Federal Reserve Bank of Chicago 46th Annual Conference on Bank Structure and Competition, Chicago, Illinois

The Taylor Rule and the Practice of Central Banking by Pier Francesco Asso, George A. Kahn, and Robert Leeson in Federal Reserve Bank of Kansas City Working Paper , February 2010

The Taylor rule has revolutionized the way many policymakers at central banks think about monetary policy. It has framed policy actions as a systematic response to incoming information about economic conditions, as opposed to a period-by-period optimization problem. It has emphasized the importance of adjusting policy rates more than one-for-one in...  

Toward an Effective Resolution Regime for Large Financial Institutions by Daniel K. Tarullo in Board of Governors Speech , March 2010

At the Symposium on Building the Financial System of the 21st Century, Armonk, New York

A Word on the Economy (with audio) by Julie L. Stackhouse in Federal Reserve Bank of St. Louis Educational Resources , September 2009

A powerpoint slideshow describing the subprime mortgage meltdown and how it relates to the overall financial crisis. Updated September 2009

“How Central Should the Central Bank Be?” A Comment by Christopher J. Neely in Federal Reserve Bank of St. Louis Economic Synopses , April 2010

The Reserve Bank presidents are fully accountable to our democratic institutions and the decentralized structure promotes healthy debate on monetary policy and regulatory issues.

Actions to Restore Financial Stability: A summary of recent Federal Reserve initiatives by Niel Willardson in The Region (Minneapolis Fed) , December 2008

This article provides a summary of recent Federal Reserve initiatives designed to reestablish normal credit channels and flows in the wake of the current financial crisis.

Activist Fiscal Policy to Stabilize Economic Activity by Alan J. Auerbach and William G. Gale in Federal Reserve Bank of Kansas City Symposium , August 2009

This paper examines the effects of discretionary fiscal policy in the current financial crisis.

Alt-A: The Forgotten Segment of the Mortgage Market by Rajdeep Sengupta in Federal Reserve Bank of St. Louis Review , January 2010

This study presents a brief overview of the Alt-A mortgage market with the goal of outlining broad trends in the different borrower and mortgage characteristics of Alt-A market originations between 2000 and 2006. The paper also documents the default patterns of Alt-A mortgages in terms of the various borrower and mortgage characteristics over th...  

Asset Bubbles and the Implications for Central Bank Policy by William C. Dudley in Federal Reserve Bank of New York , April 2010

Remarks at The Economic Club of New York, New York City

An Autopsy of the U.S. Financial System: Accident, Suicide, or Negligent Homicide? by Ross Levine in Brown University Working Paper , April 2010

In this postmortem, I find that the design, implementation, and maintenance of financial policies during the period from 1996 through 2006 were primary causes of the financial system’s demise. The evidence is inconsistent with the view that the collapse of the financial system was caused only by the popping of the housing bubble and the herding ...  

Bank Exposure to Commercial Real Estate by Yuliya Demyanyk and Kent Cherny in Federal Reserve Bank of Cleveland Economic Trends , August 2009

As rising home foreclosures and delinquencies continue to undermine a financial and economic recovery, an increasing amount of attention is being paid to another corner of the property market: commercial real estate. This article discusses bank exposure to the commercial real estate market.

Bankers Acceptances and Unconventional Monetary Policy: FAQs by Richard G. Anderson in Federal Reserve Bank of St. Louis Economic Synopses , March 2009

An expansion and FAQ following on an earlier article ("Bankers Acceptances: Yesterday's Instrument to Re-Start Today's Credit Markets?"). Describes possible implementation of a Banker's Acceptances program at the Federal Reserve.

Bankers’ Acceptances: Yesterday’s Instrument to Restart Today's Credit Markets? by Richard G. Anderson in Federal Reserve Bank of St. Louis Economic Synopses , January 2009

This note suggests considering an old—not new—financial market instrument: bankers’ acceptances. Bankers’ acceptances are one of the world’s older financial instruments, used as early as the twelfth century. Bankers’ acceptances have a long history in the Federal Reserve. Bankers’ acceptances are an old idea whose time may have returned—but with c...  

Beyond the Crisis: Reflections on the Challenges by Terrence J. Checki in Federal Reserve Bank of New York Speech , December 2009

A discussion of the challenges facing the financial system and reform.

A Black Swan in the Money Market by John B. Taylor and John C. Williams in Federal Reserve Bank of San Francisco Working Paper , April 2008

At the center of the financial market crisis of 2007-2008 was a jump in spreads between the overnight inter-bank lending rate and term London inter-bank offer rates (Libor). Because many private loans are linked to Libor rates, the sharp increase in these spreads raised the cost of borrowing and interfered with monetary policy. The widening spread...  

Central Bank Exit Policies by Donald L. Kohn in Speech, Board of Governors , September 2009

Kohn briefly underlines some aspects of the Federal Reserve's framework for exiting the unusual policies put in place to ameliorate the effects of the financial turmoil of the past two years

Central Bank Response to the 2007-08 Financial Market Turbulence: Experiences and Lessons Drawn by Alexandre Chailloux, Simon Gray, Ulrich Klüh, Seiichi Shimizu, and Peter Stella in IMF Working Paper , September 2008

The paper reviews the policy response of major central banks during the 2007–08 financial market turbulence and suggests that there is scope for convergence among central bank operational frameworks through the adoption of those elements that proved most instrumental in calming markets. These include (i) rapid liquidity provision to a broad rang...  

Central Banks and Financial Crises by Willem H. Buiter in Federal Reserve Bank of Kansas City's Symposium: Maintaining Stability in a Changing Financial System , August 2008

This paper draws lessons from the experience of the past year for the conduct of central banks in the pursuit of macroeconomic and financial stability. Macroeconomic stability is defined as either price stability or as price stability and sustainable output or employment growth. Financial stability refers to (1) the absence of asset price bubbles...  

Commercial Bank Lending Data during the Crisis: Handle with Care by Silvio Contessi and Hoda El-Ghazaly, in Federal Reserve Bank of St. Louis Economic Synopses , August 2009

A discussion of commercial bank lending data, inferences that can be drawn from the data, and some caveats about the data.

Confronting Too Big to Fail by Daniel K. Tarullo in Speech, Board of Governors , October 2009

Tarullo suggests that the reform process cannot be judged a success unless it substantially reduces systemic risk generally and, in particular, the too-big-to-fail problem. This speech addresses the task of forging an effective response to this problem

Conventional and Unconventional Monetary Policy by Vasco Cúrdia and Michael Woodford in Federal Reserve Bank of New York Staff Reports , November 2009

We extend a standard New Keynesian model both to incorporate heterogeneity in spending opportunities along with two sources of (potentially time-varying) credit spreads and to allow a role for the central bank’s balance sheet in determining equilibrium. We use the model to investigate the implications of imperfect financial intermediation for famil...  

Crisis and Responses: the Federal Reserve and the Financial Crisis of 2007-08 by Stephen G. Cecchetti in NBER Working Paper (requires subscription) , June 2008

Realizing that their traditional instruments were inadequate for responding to the crisis that began on 9 August 2007, Federal Reserve officials improvised. Beginning in mid-December 2007, they implemented a series of changes directed at ensuring that liquidity would be distributed to those institutions that needed it most. Conceptually, this me...  

The Curious Case of the U.S. Monetary Base by Richard G. Anderson in Federal Reserve Bank of St. Louis Regional Economist , July 2009

Recent increases in the monetary base are far greater than any previously in American history, surely a "noble experiment" in policymaking. Whether these policies can succeed—and without accelerating inflation—remains to be seen.

The Dependence of the Financial System on Central Bank and Government Support by Petra Gerlach in BIS Quarterly Review , March 2010

How much does the banking sector depend on public support? Utilisation of many support facilities has declined, due mainly to a fall in demand. Supply factors play a smaller, but not insignificant role, as governments and central banks have tightened the conditions on which certain support measures are available or have phased them out entirely. Ho...  

Do Central Bank Liquidity Facilities by Jens H. E. Christensen, Jose A. Lopez, and Glenn D. Rudebusch in Federal Reserve Bank of San Francisco Working Paper , June 2009

In response to the global financial crisis that started in August 2007, central banks provided extraordinary amounts of liquidity to the financial system. To investigate the effect of central bank liquidity facilities on term interbank lending rates, the authors estimate a six-factor arbitrage-free model of U.S. Treasury yields, financial corporate...  

The Economic Outlook and the Fed's Balance Sheet: The Issue of "How" versus "When" by William C. Dudley in Speech , July 2009

Dudley comments on the economy and the economic outlook—where we have been and where we may be going. He suggests that the balance of risks is still tilted toward weakness in growth and employment and not toward higher inflation. He also discusses the impact of the Federal Reserve’s lending facilities and purchase programs on the size of the Fed’s ...  

Economic Policy: Lessons from History by Ben S. Bernanke in Board of Governors Speech , April 2010

At the 43rd Annual Alexander Hamilton Awards Dinner, Center for the Study of the Presidency and Congress, Washington, D.C.

The Effect of the Term Auction Facility on the London Inter-Bank Offered Rate by James McAndrews, Asani Sarkar and Zhenyu Wang in Federal Reserve Bank of New York Staff Report , July 2008

This paper examines the effects of the Federal Reserve’s Term Auction Facility (TAF) on the London Inter-Bank Offered Rate (LIBOR). The particular question investigated is whether the announcements and operations of the TAF are associated with downward shifts of the LIBOR; such an association would provide one indication of the efficacy of the TAF ...  

Effective Practices in Crisis Resolution and the Case of Sweden by O. Emre Ergungor and Kent Cherny in Federal Reserve Bank of Cleveland Economic Commentary , February 2009

The current fi nancial crisis is a painful reminder that the developed world is not yet immune to these devastating shocks. But while we haven’t learned to prevent them, we have learned some lessons about what is necessary to contain them once they begin and to limit the damage that follows. As policymakers worldwide focus on resolving the current ...  

The Fed as Lender of Last Resort by James B. Bullard in Federal Reserve Bank of St. Louis Regional Economist , January 2009

Because our central bank has relied on the federal funds rate target for so long to guide the economy, many people think that the target rate is the only tool at the Fed’s disposal. As we are seeing in the current financial crisis, the Fed has other options. Most visible so far have been the lending programs that have been created in the past year,...  

The Fed's Response to the Credit Crunch by Craig P. Aubuchon in Federal Reserve Bank of St. Louis Econoimc Synopses , January 2009

The Federal Reserve Board has used Section 13(3) of the Federal Reserve Act to create several new lending facilities to address the ongoing strains in the credit market.

The Fed, Liquidity, and Credit Allocation by Daniel Thornton in Federal Reserve Bank of St. Louis Review , January 2009

The current financial turmoil has generated considerable discussion of liquidity. Moreover, it has been widely reported that the Federal Reserve played a major role in supplying liquidity to financial markets during this distressed time. This article describes two ways in which the Fed has supplied liquidity since late 2007. The first is traditiona...  

The Federal Reserve as Lender of Last Resort during the Panic of 2008 by Kenneth N. Kuttner in Committee on Capital Markets Regulation Report , December 2008

This report examines the impact of the Fed’s unprecedented lending on its formulation and implementation of monetary policy. The first section provides some background on the Fed’s recent actions within the context of its role as lender of last resort (LOLR). The second outlines some of the ways in which the surge in Fed lending has affected the...  

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Federal Reserve Assets: Understanding the Pieces of the Pie by Charles S. Gascon in Federal Reserve Bank of St. Louis Economic Synopses , March 2009

This paper examines the composition of assets on the Fed’s balance sheet and groups them according to the objectives of the programs used to acquire them.

The Federal Reserve's Balance Sheet: An Update by Ben S. Bernanke in Speech, Board of Governors , October 2009

Bernanke reviews the most important elements of the Federal Reserve's balance sheet, as well as some aspects of their evolution over time. With this, he explains the steps the Federal Reserve has taken, beyond conventional interest rate reductions, to mitigate the financial crisis and the recession, as well as how those actions will be reversed as ...  

Federal Reserve's exit strategy by Ben S. Bernanke in Board of Governors Testimony , February 2010

Statement before the Committee on Financial Services, U.S. House of Representatives, Washington, D.C. as prepared for delivery. The hearing was postponed due to inclement weather.

The Federal Reserve's Term Auction Facility by Olivier Armantier, Sandra Krieger and James McAndrews in Federal Reserve Bank of New York: Current Issues in Economics and Finance , July 2008

As liquidity conditions in the term funding markets grew increasingly strained in late 2007, the Federal Reserve began making funds available directly to banks through a new tool, the Term Auction Facility (TAF). The facility is designed to improve liquidity by making it easier for sound institutions to borrow when the markets are not operating ...  

The Federal Reserve’s Commercial Paper Funding Facility by Tobias Adrian, Karin Kimbrough, and Dina Marchioni in Federal Reserve Bank of New York Staff Reports , January 2010

The Federal Reserve created the Commercial Paper Funding Facility (CPFF) in the midst of severe disruptions in money markets following the bankruptcy of Lehman Brothers on September 15, 2008. The CPFF finances the purchase of highly rated unsecured and asset-backed commercial paper from eligible issuers via primary dealers. The facility is a liquid...  

Financial Crises and Bank Failures: A Review of Prediction Methods by Yuliya Demyanyk and Iftekhar Hasan in Federal Reserve Bank of Cleveland Working Paper , June 2009

In this article the authors analyze financial and economic circumstances associated with the U.S. subprime mortgage crisis and the global financial turmoil that has led to severe crises in many countries. They suggest that the level of cross-border holdings of long-term securities between the United States and the rest of the world may indicate...  

The Financial Crisis: An Inside View by Phillip Swagel in Brookings Papers on Economic Activity , April 2009

This paper reviews the events associated with the credit market disruption that began in August 2007 and developed into a full-blown crisis in the fall of 2008. This is necessarily an incomplete history: the paper is being written in the months immediately after Swagel left Treasury, where he served as Assistant Secretary for Economic Policy from D...  

Financial Instability, Reserves, and Central Bank Swap Lines in the Panic of 2008 by Maurice Obstfeld, Jay C. Shambaugh and Alan M. Taylor in AEA Presentation Paper , December 2008

In this paper the authors connect the events of the last twelve months, “the Panic of 2008” as it has been called, to the demand for international reserves. In previous work, the authors have shown that international reserve demand can be rationalized by a central bank’s desire to backstop the broad money supply to avert the possibility of an in...  

Financial Intermediaries, Financial Stability and Monetary Policy by Tobias Adrian and Hyun Song Shin in Federal Reserve Bank of Kansas City's Symposium: Maintaining Stability in a Changing Financial System , September 2008

In a market-based financial system, banking and capital market developments are inseparable. Adrian and Shin document evidence that balance sheets of market-based financial intermediaries provide a window on the transmission of monetary policy through capital market conditions. Short-term interest rates are determinants of the cost of leverage and ...  

Focusing on Bank Interest Rate Risk Exposure by Donald L. Kohn in Board of Governors Speech , January 2010

At the Federal Deposit Insurance Corporation's Symposium on Interest Rate Risk Management, Arlington, Virginia

A Framework for Assessing the Systemic Risk of Major Financial Institutions by Xin Huang, Hao Zhou, and Haibin Zhu in Federal Reserve Board, Finance and Economics Discussion Series , September 2009

In this paper the authors propose a framework for measuring and stress testing the systemic risk of a group of major financial institutions. The systemic risk is measured by the price of insurance against financial distress, which is based on ex ante measures of default probabilities of individual banks and forecasted asset return correlations. Imp...  

Further Results on a Black Swan in the Money Market by John B. Taylor and John C. Williams in Stanford University Working Paper , May 2008

Using alternative measures of term lending rates and counterparty risk and a wide variety of econometric specifications, we find that counterparty risk has a robust significant effect on interest rate spreads in the term inter-bank loan markets. In contrast, we do not find comparably robust evidence of significant negative effects of the Fed’s t...  

Getting Back on Track: Macroeconomic Policy Lessons from the Financial Crisis by John B. Taylor in Federal Reserve Bank of St. Louis Review , May 2010

This article reviews the role of monetary and fiscal policy in the financial crisis and draws lessons for future macroeconomic policy. It shows that policy deviated from what had worked well in the previous two decades by becoming more interventionist, less rules-based, and less predictable. The policy implications are thus that policy should “g...  

Government assistance to AIG by Scott G. Alvarez in Testimony before the Congressional Oversight Panel, U.S. Congress , May 2010

Housing, Mortgage Markets, and Foreclosures at the Federal Reserve System Conference on Housing and Mortgage Markets, Washington, D.C. by Ben Bernanke in Speech , December 2008

Housing and housing finance played a central role in precipitating the current crisis. Declining house prices, delinquencies and foreclosures, and strains in mortgage markets are now symptoms as well as causes of our general financial and economic difficulties. The most effective approach very likely will involve a full range of coordinated measu...  

How Did a Domestic Housing Slump Turn into a Global Financial Crisis? by Steven B. Kamin and Laurie Pounder DeMarco in Board of Governors International Finance Discussion Papers , January 2010

The global financial crisis clearly started with problems in the U.S. subprime sector and spread across the world from there. But was the direct exposure of foreigners to the U.S. financial system a key driver of the crisis, or did other factors account for its rapid contagion across the world? To answer this question, we assessed whether countr...  

How Not to Reduce Excess Reserves by David C. Wheelock in Federal Reserve Bank of St. Louis Economic Synopses , August 2009

The author looks back to a simliar economic situation during the 1930s for insights into how to handle excess reserves.

How the Subprime Crisis Went Global: Evidence from Bank Credit Default Swap Spreads by Barry Eichengreen, Ashoka Mody, Milan Nedeljkovic, and Lucio Sarno in NBER Working Paper (requires subscription) , April 2009

How did the Subprime Crisis, a problem in a small corner of U.S. financial markets, affect the entire global banking system? To shed light on this question we use principal components analysis to identify common factors in the movement of banks' credit default swap spreads. We find that fortunes of international banks rise and fall together even...  

How to Avoid a New Financial Crisis by Oliver Hart and Luigi Zingales in University of Chicago Booth School of Business Research Paper , November 2009

This paper discusses the origins of the financial crisis in terms of risk, and then offers proposals for ways to fix the system.

International Policy Response to the Financial Crisis by Masaaki Shirakawa in Federal Reserve Bank of Kansas City Symposium , August 2009

A discussion of the future of international coordination between central banks in the wake of the current financial crisis.

Interview with Raghuram Rajan in Federal Reserve Bank of Minneapolis Region , December 2009

An interview with Rajan discussing the current financial crisis and possible solutions for the future.

Is Monetary Policy Effective During Financial Crises? by Frederic S. Mishkin in NBER Working Paper (requires subscription) , January 2009

The tightening of credit standards and the failure of the cost of credit to households and businesses to fall despite the sharp easing of monetary policy has led to a common view that monetary policy has not been effective during the recent financial crisis. Mishkin disagrees and believes that financial crises of the type we have been experiencing ...  

Is the Financial Crisis Over? A Yield Spread Perspective by Massimo Guidolin and Yu Man Tam in Federal Reserve Bank of St. Louis Economic Synopses , September 2009

Our finding is consistent with some recent, substantial volatility in the U.S. corporate bond market and leaves open a possibility that additional, future shocks to default premia may have long-lived effects.

Lessons Learned? Comparing the Federal Reserve’s Responses to the Crises of 1929-1933 and 2007-2009 by David C. Wheelock in Federal Reserve Bank of St. Louis Review , March 2010

The financial crisis of 2007-09 is widely viewed as the worst financial disruption since the Great Depression of 1929-33. However, the accompanying economic recession was mild compared with the Great Depression, though severe by postwar standards. Aggressive monetary, fiscal, and financial policies are widely credited with limiting the impact of...  

Lessons of the Crisis: The Implications for Regulatory Reform by William C. Dudley in Speech, Federal Reserve Bank of New York , January 2010

Remarks at the Partnership for New York City Discussion, New York City.

The Longer-Term Challenges Ahead by William C. Dudley in Federal Reserve Bank of New York Speech , March 2010

Remarks at the Council of Society Business Economists Annual Dinner, London, United Kingdom

Macroprudential Supervision and Monetary Policy in the Post-crisis World by Janet L. Yellen in Board of Governors Speech , October 2010

Speech at the Annual Meeting of the National Association for Business Economics, Denver, Colorado

The Mechanics of a Graceful Exit: Interest on Reserves and Segmentation in the Federal Funds Market by Morten L. Bech and Elizabeth Klee in Federal Reserve Bank of New York Staff Reports , December 2009

To combat the financial crisis that intensified in the fall of 2008, the Federal Reserve injected a substantial amount of liquidity into the banking system. The resulting increase in reserve balances exerted downward price pressure in the federal funds market, and the effective federal funds rate began to deviate from the target rate set by the Fed...  

Monetary Policy and Asset Prices by Brett W. Fawley and Luciana Juvenal in Federal Reserve Bank of St. Louis Economic Synopses , April 2010

reminder that asset prices can and do run wild at rates capable of negative effects on real economic activity. Not surprisingly, this has reinvigorated debate over whether central banks should respond to asset price bubbles.

Monetary Policy and the Recent Extraordinary Measures Taken by the Federal Reserve by John B. Taylor in U.S. House Committee on Financial Services , February 2009

Written testimony before the Committee on Financial Services U.S. House of Representatives on monetary policy and the "extraordinary measures" taken by the Federal Reserve over the past 18 months.

Monetary Policy in the Crisis: Past, Present, and Future by Donald L. Kohn in Board of Governors Speech , January 2010

Speech given at the Brimmer Policy Forum, American Economic Association Annual Meeting, Atlanta, Georgia

More Lessons from the Crisis by William C. Dudley in Federal Reserve Bank of New York Speech , November 2009

Remarks at the Center for Economic Policy Studies Symposium

More Money: Understanding Recent Changes in the Monetary Base by William T. Gavin in Federal Reserve Bank of St. Louis Review , March 2009

The financial crisis that began in the summer of 2007 took a turn for the worse in September 2008. Until then, Federal Reserve actions taken to improve the functioning financial markets did not affect the monetary base. The unusual lending and purchase of private debt was offset by the sale of Treasury securities so that the total size of the ba...  

Moving Beyond the Financial Crisis by Elizabeth A. Duke in Board of Governors Speech , June 2010

At the Consumer Bankers Association Annual Conference, Hollywood, Florida

On the Effectiveness of the Federal Reserve's New Liquidity Facilities by Tao Wu in Federal Reserve Bank of Dallas Working Paper , May 2008

This paper examines the effectiveness of the new liquidity facilities that the Federal Reserve established in response to the recent financial crisis. I develop a no-arbitrage based affine term structure model with default risk and conduct a thorough factor analysis of the counterparty default risk among major financial institutions and the underly...  

Paying Interest on Deposits at Federal Reserve Banks by Richard G. Anderson in Federal Reserve Bank of St. Louis Economic Synopses , November 2008

The implementation of monetary policy in developed economies relies on three interest rates: a policy target rate, one or more lending (or, discount) rates, and a remuneration rate, the rate of interest the central bank pays on the deposits that banks hold at the central bank. In the current economic crisis, management of the remuneration rate has ...  

Policies to Bring Us Out of the Financial Crisis and Recession by Donald L. Kohn in Speech , April 2009

Kohn discusses the actions the government is taking to address our current financial and economic difficulties, focusing on the economic and financial problems and policy responses in the United States.

Provision of Liquidity through the Primary Credit Facility during the Financial Crisis: A Structural Analysis by Erhan Artuç and Selva Demiralp in Federal Reserve Bank of New York Economic Policy Review , October 2009

In response to the liquidity crisis that began in August 2007, central banks designed a variety of tools for supplying liquidity to financial institutions. The Federal Reserve introduced several programs, such as the Term Auction Facility, the Term Securities Lending Facility, and the Primary Dealer Credit Facility, while enhancing its open market ...  

Putting the Low Road Behind Us by Governor Sarah Bloom Raskin in Speech at the 2011 Midwinter Housing Finance Conference, Park City, Utah , February 2011

In this speech Governor Raskin shares some thoughts about the powerful impact the housing and mortgage markets have on the nation's economic recovery, presents some ideas to effect positive change in the mortgage servicing industry, and finally imparts a guiding principle that should help us find our way through the current struggles and drive the ...  

Quantitative Easing: Entrance and Exit Strategies by Alan S. Blinder in Federal Reseve Bank of St. Louis Homer Jones Memorial Lecture , April 2010

Blinder discussed the concept of quantitative easing, the Fed's entrance strategy, the Fed's exit strategy, and its implications for central bank independence.

Questions about Fiscal Policy: Implications from the Financial Crisis of 2008-2009 by N. Gregory Mankiw in Federal Reserve Bank of St. Louis Review , May 2010

This article is a modified version of remarks given at the Federal Reserve Bank of Philadelphia’s policy forum “Policy Lessons from the Economic and Financial Crisis,” December 4, 2009.

Questions and Answers about the Financial Crisis by Gary Gorton in Prepared Testimony for the U.S. Financial Crisis Inquiry Commission , February 2010

All bond prices plummeted (spreads rose) during the financial crisis, not just the prices of subprimerelated bonds. These price declines were due to a banking panic in which institutional investors and firms refused to renew sale and repurchase agreements (repo) – short?term, collateralized, agreements that the Fed rightly used to count as money...  

Reaping the Full Benefits of Financial Openness by Yellen, Janet L. in Federal Reserve Board of Governors Speech , May 2011

Speech at the Bank of Finland 200th Anniversary Conference, Helsinki, Finland

Reflections on a Year of Crisis by Ben S. Bernanke in Federal Reserve Bank of Kansas City Symposium , August 2009

The opening remarks at the Jackson Hole conference, "Financial Stability and Macroeconomic Policy"

Resolution Process for Financial Companies that Pose Systemic Risk to the Financial System and Overall Economy by Thomas M. Hoenig, Charles S. Morris, and Kenneth Spong in Federal Reserve Bank of Kansas City Speech , September 2009

The Under current law, financial regulators do not have the authority to resolve financial holding companies and non-depository financial companies that are in default or serious danger of default as they have with depository institutions. Although the normal bankruptcy process is a very effective process for most non-depository financial companie...  

Rethinking Macroeconomic Policy by Olivier Blanchard, Giovanni Dell’Ariccia, and Paolo Mauro in IMF Staff Position Note , February 2010

The great moderation lulled macroeconomists and policymakers alike in the belief that we knew how to conduct macroeconomic policy. The crisis clearly forces us to question that assessment. In this paper, we review the main elements of the pre-crisis consensus, we identify where we were wrong and what tenets of the pre-crisis framework still hold, a...  

The Risk of Deflation by John C.Williams in Federal Reserve Bank of San Francisco Economic Letter , March 2009

This article examines the risk of deflation in the United States by reviewing the evidence from past episodes of deflation and inflation.

The Role of the Federal Reserve in a New Financial Order by Paul A. Volcker in Speech at the Economic Club of New York , January 2010

Paul Volcker's discussion of the role of the Federal Reserve in light of the Financial Crisis.

The Role of the Securitization Process in the Expansion of Subprime Credit by Taylor D. Nadauld and Shane M. Sherlund in Board of Governors Finance and Economics Discussion Series , April 2009

The authors analyze the structure and attributes of subprime mortgage-backed securitization deals originated between 1997 and 2007. Their data set allows us to link loan-level data for over 6.7 million subprime loans to the securitization deals into which the loans were sold. They show that the securitization process, including the assignment of cr...  

Shadow Banking by Zoltan Pozsar, Tobias Adrian, Adam Ashcraft, Hayley Boesky in Federal Reserve Bank of New York Staff Reports no. 458 , July 2010

This paper documents the origins, evolution and economic role of the shadow banking system. Its aim is to aid regulators and policymakers globally to reform, regulate and supervise the process of securitized credit intermediation in a market-based financial system.

The Shadow Banking System: Implications for Financial Regulation by Tobias Adrian and Hyun Song Shin in Federal Reserve Bank of New York Staff Report , July 2009

The current financial crisis has highlighted the growing importance of the “shadow banking system,” which grew out of the securitization of assets and the integration of banking with capital market developments. This trend has been most pronounced in the United States, but it has had a profound influence on the global financial system. In a market-...  

Should Monetary Policy “Lean or Clean”?* by William R. White in Federal Reserve Bank of Dallas Working Paper , August 2009

It has been contended by many in the central banking community that monetary policy would not be effective in “leaning” against the upswing of a credit cycle (the boom) but that lower interest rates would be effective in “cleaning” up (the bust) afterwards. In this paper, these two propositions (can’t lean, but can clean) are examined and found ser...  

Some Observations and Lessons from the Crisis by Simon M. Potter in Federal Reserve Bank of New York Speech , June 2010

Remarks at the Third Annual Connecticut Bank and Trust Company Economic Outlook Breakfast, Hartford, Connecticut

Structural Causes of the Global Financial Crisis: A Critical Assessment of the ‘New Financial Architecture’ by James Crotty in University of Massachusetts Amherst Working Paper , August 2008

The main thesis of this paper is that the ultimate cause of the current global financial crisis is to be found in the deeply flawed institutions and practices of what is often referred to as the New Financial Architecture (NFA) – a globally integrated system of giant bank conglomerates and the so-called ‘shadow banking system’ of investment ban...  

Systemic Risk and Deposit Insurance Premiums by Viral V. Acharya, João A. C. Santos, and Tanju Yorulmazer in Federal Reserve Bank of New York Economic Policy Review , October 2009

While systemic risk—the risk of wholesale failure of banks and other financial institutions—is generally considered to be the primary reason for supervision and regulation of the banking industry, almost all regulatory rules treat such risk in isolation. In particular, they do not account for the very features that create systemic risk in the first...  

Systemic Risk and the Financial Crisis: A Primer by James Bullard, Christopher J. Neely, and David C. Wheelock in Federal Reserve Bank of St. Louis Review , September 2009

How did problems in a relatively small portion of the home mortgage market trigger the most severe financial crisis in the United States since the Great Depression? Several developments played a role, including the proliferation of complex mortgage-backed securities and derivatives with highly opaque structures, high leverage, and inadequate risk m...  

The Term Securities Lending Facility: Origin, Design, and Effects by Michael J. Fleming, Warren B. Hrung and Frank M. Keane in Federal Reserve Bank of New York Current Issues in Economics and Finance , February 2009

The Federal Reserve launched the Term Securities Lending Facility (TSLF) in 2008 to promote liquidity in the funding markets and improve the operation of the broader financial markets. The facility increases the ability of dealers to obtain cash in the private market by enabling them to pledge securities temporarily as collateral for Treasuries, wh...  

Three Funerals and a Wedding by James B. Bullard in Federal Reserve Bank of St. Louis Review , January 2009

A discussion of three macroeconomic ideas that may be passing away, and one macroeconomic idea that is being rehabilitated.

Three Lessons for Monetary Policy from the Panic of 2008 by James Bullard in Federal Reserve Bank of St. Louis Review , May 2010

This article is a modified version of a presentation given at the Federal Reserve Bank of Philadelphia’s policy forum “Policy Lessons from the Economic and Financial Crisis,” December 4, 2009.

The U.S. Financial System: Where We Have Been, Where We Are and Where We Need to Go by William C. Dudley in Federal Reserve Bank of New York Speech , February 2010

Remarks at the Reserve Bank of Australia's 50th Anniversary Symposium, Sydney, Australia

Unconventional Monetary Policy Actions by Glen D. Rudebusch in Federal Reserve Bank of San Francisco FedViews , March 2009

Glenn D. Rudebusch, senior vice president and associate director of research at the Federal Reserve Bank of San Francisco, states his views on recent unconventional monetary policy actions. Charts are included.

United States: Financial System Stability Assessment by The Monetary and Capital Markets and Western Hemisphere Departments of the International Monetary Fund in International Monetary Fund, IMF Country Report No. 10/247 , July 2010

A forceful policy response has rolled back systemic market pressures, but the cost of intervention has been high and stability is tenuous. Comprehensive reforms are being legislated, addressing many of the issues that left the system vulnerable. Given the severity of the crisis and the many weaknesses revealed, bolder action could have been envi...  

Valuing the Treasury’s Capital Assistance Program by Paul Glasserman and Zhenyu Wang in Federal Reserve Bank of New York Staff Reports , December 2009

The Capital Assistance Program (CAP) was created by the U.S. government in February 2009 to provide backup capital to large financial institutions unable to raise sufficient capital from private investors. Under the terms of the CAP, a participating bank receives contingent capital by issuing preferred shares to the Treasury combined with embedded ...  

A View of the Economic Crisis and the Federal Reserve’s by Janet L. Yellen in Federal Reserve Bank of San Francisco Economic Letter , July 2009

The Federal Reserve has responded to a severe recession by developing programs to bolster the financial system and restore economic growth. The Fed has the tools to unwind these programs when appropriate, maintaining price stability. The following is adapted from a speech delivered by the president and CEO of the Federal Reserve Bank of San Francis...  

Walter Bagehot, the Discount Window, and TAF by Daniel Thornton in Federal Reserve Bank of St. Louis Economic Synopses , October 2008

In response to the mortgage-related distress in financial markets, the Fed has implemented a number of new lending programs. Prominent among these is the Term Auction Facility (TAF), through which the Federal Reserve Banks auction funds to depository institutions. Under the TAF, depository institutions compete for funds by indicating the amount th...  

Would Quantitative Easing Sooner Have Tempered the Financial Crisis and Economic Recession? by Daniel L. Thornton in Federal Reserve Bank of St. Louis Economic Synopses , August 2009

The author examines the timing of the quantitative easing employed by the Federal Reserve.

The Aftermath of Financial Crises by Carmen Reinhart and Kenneth S. Rogoff in Harvard University Working Paper , December 2008

This paper presents a comparative historical analysis that is focused on the aftermath of systemic banking crises. This study of the aftermath of severe financial crises includes a number of recent emerging market cases to expand the relevant set of comparators. Also included in the comparisons are two prewar developed country episodes for which w...  

Banking Crises: An Equal Opportunity Menace by Carmen M. Reinhart and Kenneth S. Rogoff in Harvard University Working Paper , December 2008

The historical frequency of banking crises is quite similar in high- and middle-to-low income countries, with quantitative and qualitative parallels in both the run-ups and the aftermath. The authors establish these regularities using a unique dataset spanning from Denmark’s financial panic during the Napoleonic War to the ongoing global financial ...  

The Crisis through the Lens of History by Charles Collyns in International Monetary Fund: Finance and Development , December 2008

The current financial crisis is ferocious, but history shows the way to avoid another Great Depression

The Current Financial Crisis: What Should We Learn from the Great Depressions of the Twentieth Century? by Gonzalo Fernández de Córdoba and Timothy J. Kehoe in Federal Reserve Bank of Minneapolis Staff Report , March 2009

Studying the experience of countries that have experienced great depressions during the twentieth century teaches us that massive public interventions in the economy to maintain employment and investment during a financial crisis can, if they distort incentives enough, lead to a great depression.

The Evolution of the Subprime Mortgage Market by Souphala Chomsisengphet and Anthony Pennington-Cross in Federal Reserve Bank of St. Louis Review , January 2006

This paper describes subprime lending in the mortgage market and how it has evolved through time. Subprime lending has introduced a substantial amount of risk-based pricing into the mortgage market by creating a myriad of prices and product choices largely determined by borrower credit history (mortgage and rental payments, foreclosures and bankru...  

Financial Statistics for the United States and the Crisis: What Did They Get Right, What Did They Miss, and How Should They Change? by Matthew J. Eichner, Donald L. Kohn, and Michael G. Palumbo in Board of Governors Finance and Economics Discussion Series , April 2010

Although the instruments and transactions most closely associated with the financial crisis of 2008 and 2009 were novel, the underlying themes that played out in the crisis were familiar from previous episodes: Competitive dynamics resulted in excessive leverage and risktaking by large, interconnected firms, in heavy reliance on short-term sourc...  

The Global Credit Crisis as History by Barry Eichengreen in University of California Berkeley Polcy Paper , December 2008

During the Great Depression the Fed waited too long to execute its responsibilities as a lender of last resort, thus allowing the banking system to collapse. This time, there has been little hesitation on the part of the Fed to act, which leaves two questions: Why, given that this is a global credit crisis, have policy makers in other countries fai...  

An Historical Perspective on the Crisis of 2007-2008 by Michael D. Bordo in Bank of Chile Conference , November 2008

The current international financial crisis is part of a perennial pattern. Today’s events have echoes in earlier big international financial crises which were triggered by events in the U.S. financial system. Examples include the crises of 1857,1893, 1907 and 1929-1933. This crisis has many similarities to those of the past but also some important ...  

Slapped in the Face by the Invisible Hand: Banking and the Panic of 2007 by Gary B. Gorton in SSRN Paper , May 2009

The 'shadow banking system' at the heart of the current credit crisis is, in fact, a real banking system – and is vulnerable to a banking panic. Indeed, the events starting in August 2007 are a banking panic. A banking panic is a systemic event because the banking system cannot honor its obligations and is insolvent. Unlike the historical banking p...  

Stock-Market Crashes and Depressions by Robert J. Barro and José F. Ursúa in NBER Working Paper (requires subscription) , February 2009

Long-term data for 25 countries up to 2006 reveal 195 stock-market crashes (multi-year real returns of -25% or less) and 84 depressions (multi-year macroeconomic declines of 10% or more), with 58 of the cases matched by timing. The United States has two of the matched events--the Great Depression 1929-33 and the post-WWI years 1917-21, likely drive...  

Systemic Banking Crisis: A New Database by Luc Laeven and Fabian Valencia in IMF Working Paper , November 2008

This paper presents a new database on the timing of systemic banking crises and policy responses to resolve them. The database covers the universe of systemic banking crises for the period 1970-2007, with detailed data on crisis containment and resolution policies for 42 crisis episodes, and also includes data on the timing of currency crises and s...  

This Time is Different: A Panoramic View of Eight Centuries of Financial Crises by Carmen M. Reinhart and Kenneth S. Rogoff in Harvard University Working Paper , April 2008

This paper offers a “panoramic” analysis of the history of financial crises dating from England’s fourteenth-century default to the current United States sub-prime financial crisis. Our study is based on a new dataset that spans all regions. It incorporates a number of important credit episodes seldom covered in the literature, including for exampl...  

Using Monetary Policy to Stabilize Economic Activity by Carl E. Walsh in Federal Reserve Bank of Kansas City Symposium , August 2009

This essay examines the role of monetary policy in stabilizing real economic activity. The author discusses the consensus on monetary policy that developed over the last twenty years. He then examines monetary policy when the policy interest rate has fallen to zero. The paper also assess issues relevant for post-crisis monetary policy.

Where We Go from Here: The Crisis and Beyond by Richard W. Fisher in Federal Reserve Bank of Dallas Speech , March 2010

Remarks before the Eller College of Management, University of Arizona

Booms and Busts: The Case of Subprime Mortgages by Edward M. Gramlich in Federal Reserve Bank of Kansas City Economic Review , September 2007

Booms and busts have played a prominent role in American economic history. In the 19th century, the United States benefited from the canal boom, the railroad boom, the minerals boom, and a financial boom. The 20th century brought another financial boom, a postwar boom, and a dot-com boom. The details differed, but each of these cases featured init...  

Central Bank Tools and Liquidity Shortages by Stephen G. Cecchetti and Piti Disyatat in Federarl Reserve Bank of New York Economic Policy Review , October 2009

The global financial crisis that began in mid-2007 has renewed concerns about financial instability and focused attention on the fundamental role of central banks in preventing and managing systemic crises. In response to the turmoil, central banks have made extensive use of both new and existing tools for supplying central bank money to financial ...  

Changes in the U.S. Financial System and the Subprime Crisis by Jan Kregel in Levy Economics Institute Working Paper , April 2008

The paper provides a background to the forces that have produced the present system of residential housing finance, the reasons for the current crisis in mortgage financing, and the impact of the crisis on the overall financial system.

The Consequences of Mortgage Credit Expansion: Evidence from the U.S. Mortgage Default Crisis by Atif R. Mian, Amir Sufi in SSRN Working Paper , December 2008

We conduct a within-county analysis using detailed zip code level data to document new findings regarding the origins of the biggest financial crisis since the Great Depression. The recent sharp increase in mortgage defaults is significantly amplified in subprime zip codes, or zip codes with a disproportionately large share of subprime borrowers as...  

Counterparty Risk in the Over-The-Counter Derivatives Market by Miguel A. Segoviano and Manmohan Singh in IMF Working Paper , November 2008

The financial market turmoil of recent months has highlighted the importance of counterparty risk. Here, we discuss counterparty risk that may stem from the OTC derivatives markets and attempt to assess the scope of potential cascade effects. This risk is measured by losses to the financial system that may result via the OTC derivative contracts fr...  

The Credit Crisis and Cycle Proof Regulation by Raghuram G. Rajan in Federal Reserve Bank of St. Louis Review , September 2009

Rajan offers what he called "cycle proof regulation" to help head off a future crisis. Among other things, he proposed: -Highly leveraged financial institutions would be required to buy fully collateralized insurance. This insurance would inject contingent capital into those institutions when they're in trouble. -Financial institutions considered...  

The Credit Crisis: Conjectures about Causes and Remedies by Douglas W. Diamond and Raghuram G. Rajan in AEA Presentation Paper , December 2008

What caused the financial crisis that is sweeping across the world? What keeps asset prices and lending depressed? What can be done to remedy matters? While it is too early to arrive at definite answers to these questions, the focus of this paper is to offer offer informed conjectures.

Did Credit Scores Predict the Subprime Crisis? by Yuliya Demyanyk in Federal Reserve Bank of St. Louis Regional Economist , October 2008

One might expect to find a connection between borrowers' FICO scores and the incidence of default and foreclosure during the current crisis. The data don't show such a cause and effect, however.

Did Prepayments Sustain the Subprime Market? by Geetesh Bhardwaj and Rajdeep Sengupta in Federal Reserve Bank of St. Louis Working Paper , October 2008

This paper demonstrates that the reason for widespread default of mortgages in the subprime market was a sudden reversal in the house price appreciation of the early 2000's. Using loan-level data on subprime mortgages, we observe that the majority of subprime loans were hybrid adjustable rate mortgages, designed to impose substantial financial ...  

The Fed's Expanded Balance Sheet by Brian P. Sack in Federal Reserve Bank of New York Speech , December 2009

The Fed’s balance sheet has moved to the forefront of its policy efforts. Accordingly, to understand the policy choices that lie ahead for the Federal Reserve, one has to understand how the balance sheet got to where it is and what effects it has had on financial markets.

Financial Crises and Economic Activity by Stephen G. Cecchetti, Marion Kohler and Christian Upper in Federal Reserve Bank of Kansas City Symposium , August 2009

The authors use historical data to examine past systemic banking crises and compare them to the current crisis. They also look at the long-term effects of a crisis on economic output.

The Financial Crisis and the Policy Response: An Empirical Analysis of What Went Wrong by John B. Taylor in Stanford University Working Paper , November 2008

This paper is an empirical investigation of the role of government actions and interventions in the financial crisis that flared up in August 2007.

Financial Reform or Financial Dementia? by Richard W. Fisher in Federal Reserve Bank of Dallas Speech , June 2010

Remarks at the SW Graduate School of Banking 53rd Annual Keynote Address and Banquet

Fixing Finance: A Roadmap for Reform by Robert E. Litan and Martin N. Baily in Brookings Institution , February 2009

This paper suggests a roadmap for reform of the financial system. The authors suggest that the guiding principles should be market discipline and sound regulation, and provide a detailed outline for changes in financial policy.

Has Financial Development Made the World Riskier? by Raghuram G. Rajan in Federal Reserve Bank of Kansas City's Symposium: The Greenspan Era: Lessons for the Future , August 2005

This paper (written pre-crisis in 2005) examines the revolutionary changes in financial systems around the world, such as greater borrowing at lower rates, the multitude of investment options catering to every possible profile of risk and return, and the ability to share risks with strangers from across the globe. The author questions the costs of...  

Has the Recent Real Estate Bubble Biased the Output Gap? by Chanont Banternghansa and Adrian Peralta-Alva in Federal Reserve Bank of St. Louis Economic Synopses , December 2009

The authors offer a word of caution to policymakers: Policies based on point estimates of the output gap may not rest on solid ground.

Hedge Funds, Systemic Risk, and the Financial Crisis of 2007-2008 by Andrew W. Lo in U.S. House Committee on Oversight and Government Reform , November 2008

This article is the written testimony of Andrew Lo on the role of hedge funds in the U.S. financial system and their regulation. For the preliminary transcript, see http://oversight.house.gov/documents/20081114143312.pdf

The Information Value of the Stress Test and Bank Opacity by Stavros Peristiani, Donald P. Morgan, and Vanessa Savino in Federal Reserve Bank of New York Staff Reports, no. 460 , July 2010

We investigate whether the “stress test,” the extraordinary examination of the nineteen largest U.S. bank holding companies conducted by federal bank supervisors in 2009, produced information demanded by the market. Using standard event study techniques, we find that the market had largely deciphered on its own which banks would have capital ga...  

Lessons for the Future from the Financial Crisis by Eric S. Rosengren in Speech before Massachusetts Newspaper Publishers Association Annual Meeting , December 2009

In a storytelling format, Rosengren explains why it was necessary to “bail out” certain firms – like AIG – and what this story teaches us about avoiding such necessities in the future. Also, why the Federal Reserve took such aggressive action to dramatically expand its balance sheet to address the crisis – and what implications and effects we expe...  

Making Sense of the Subprime Crisis by Kristopher S. Gerardi, Andreas Lehnert, Shane M. Sherland, and Paul S. Willen in Federal Reserve Bank of Boston Working Paper , December 2008

This paper explores the question of whether market participants could have or should have anticipated the large increase in foreclosures that occurred in 2007 and 2008. Most of these foreclosures stem from loans originated in 2005 and 2006, leading many to suspect that lenders originated a large volume of extremely risky loans during this period. ...  

Monetary Policy and the Housing Bubble by Ben S. Bernanke in Board of Governors Speech , January 2010

Speech given at the Annual Meeting of the American Economic Association, Atlanta, Georgia

Quick Exits of Subprime Mortgages by Yuliya S. Demyanyk in Federal Reserve Bank of St. Louis Review , March 2009

All holders of mortgage contracts, regardless of type, have three options: keep their payments current, prepay (usually through refinancing), or default on the loan. The latter two options terminate the loan. The termination rates of subprime mortgages that originated each year from 2001 through 2006 are surprisingly similar: about 20, 50, and 8...  

Regulation and Its Discontents by Kevin Warsh in Board of Governors Speech , February 2010

At the New York Association for Business Economics, New York, New York

Rethinking Capital Regulation by Anil K. Kashyap, Raghuram G. Rajan and Jeremy C. Stein in Federal Reserve Bank of Kansas City's Symposium: Maintaining Stability in a Changing Financial System , September 2008

Recent estimates suggest that U.S. banks and investment banks may lose up to $250 billion from their exposure to residential mortgages securities. The resulting depletion of capital has led to unprecedented disruptions in the market for interbank funds and to sharp contractions in credit supply, with adverse consequences for the larger economy. A n...  

The Rise in Mortgage Defaults by Chris Mayer, Karen Pence and Shane M. Sherlund in Federal Reserve Board Finance and Economics Discussion Series , November 2008

The main factors underlying the rise in mortgage defaults appear to be declines in house prices and deteriorated underwriting standards, in particular an increase in loan-to-value ratios and in the share of mortgages with little or no documentation of income.

The Subprime Crisis: Cause, Effect and Consequences by R. Christopher Whalen in SSRN Working Paper , June 2008

Despite the considerable media attention given to the collapse of the market for complex structured assets that contain subprime mortgages, there has been too little discussion of why this crisis occurred. The Subprime Crisis: Cause, Effect and Consequences argues that three basic issues are at the root of the problem, the first of which is an odio...  

Subprime Facts: What (We Think) We Know about the Subprime Crisis and What We Don't by Christopher L. Foote, Kristopher Gerardi, Lorenz Goette and Paul S. Willen in Federal Reserve Bank of Boston Public Policy Discussion Paper , May 2008

Using a variety of datasets, the authors document some basic facts about the current subprime crisis. Many of these facts are applicable to the crisis at a national level, while some illustrate problems relevant only to Massachusetts and New England. The authors conclude by discussing some outstanding questions about which the data, which they beli...  

Subprime Lending and Real Estate Markets by Susan M. Wachter, Andrey D. Pavlov, and Zoltan Pozsar in SSRN Working Paper , December 2008

The recent credit crunch, and liquidity deterioration, in the mortgage market have led to falling house prices and foreclosure levels unprecedented since the Great Depression. A critical factor in the post-2003 house price bubble was the interaction of financial engineering and the deteriorating lending standards in real estate markets, which fed o...  

Subprime Outcomes: Risky Mortgages, Homeownership Experiences, and Foreclosures by Kristopher Gerardi, Adam Hale Shapiro and Paul S. Willen in Federal Reserve Bank of Boston Working Paper , May 2008

This paper provides the first rigorous assessment of the homeownership experiences of subprime borrowers. We consider homeowners who used subprime mortgages to buy their homes, and estimate how often these borrowers end up in foreclosure. In order to evaluate these issues, we analyze homeownership experiences in Massachusetts over the 1989–2007 per...  

The Subprime Turmoil: What's Old, What's New, and What's Next by Charles W. Calomiris in Federal Reserve Bank of Kansas City's Symposium: Maintaining Stability in a Changing Financial System" , October 2008

We are currently experiencing a major shock to the financial system, initiated by problems in the subprime market, which spread to securitization products and credit markets more generally. Banks are being asked to increase the amount of risk that they absorb (by moving off-balance sheet assets onto their balance sheets), but losses that the banks...  

U.S. Monetary Policy and the Financial Crisis by James R. Lothian in Federal Reserve Bank of Atlanta CenFIS Working Paper , December 2009

This paper reviews U.S. Federal Reserve policy prior to and during the course of the recession that began in December 2007. It compares those policies to monetary policy during the Great Depression of the 1930s, with which this recession has been likened. The paper then discusses what policymakers will need to do to in future to avoid a surge in in...  

Understanding the Securitization of Subprime Mortgage Credit by Adam B. Ashcraft and Til Schuermann in Federal Reserve Bank of New York Staff Reports , March 2008

In this paper, the authors provide an overview of the subprime mortgage securitization process and the seven key informational frictions that arise. They discuss the ways that market participants work to minimize these frictions and speculate on how this process broke down. They continue with a complete picture of the subprime borrower and the subp...  

Understanding the Subprime Mortgage Crisis by Yuliya Demyanyk and Otto Van Hemert in SSRN Working Paper , December 2008

In this paper the authors provide evidence that the rise and fall of the subprime mortgage market follows a classic lending boom-bust scenario, in which unsustainable growth leads to the collapse of the market. Problems could have been detected long before the crisis, but they were masked by high house price appreciation between 2003 and 2005.

What to Do about Systemically Important Financial Institutions by James B. Thomson in Federal Reserve Bank of Cleveland , August 2009

The Federal Reserve Bank of Cleveland is proposing a three-tiered system for regulating systemically important financial institutions. Tier one would include high-risk institutions, such as large, interstate banks and multi-state insurance companies. Tier two would include moderately complex financial institutions, such as larger regional banks. An...  

Where's the Smoking Gun? A Study of Underwriting Standards for US Subprime Mortgages by Geetesh Bhardwaj and Rajdeep Sengupta in Federal Reserve Bank of St. Louis Working Paper , October 2008

The dominant explanation for the meltdown in the US subprime mortgage market is that lending standards dramatically weakened after 2004. Using loan-level data, Bhardwaj and Sengupta examine underwriting standards on the subprime mortgage originations from 1998 to 2007. Contrary to popular belief, the authors find no evidence of a dramatic weakening...  

Have the Fed Liquidity Facilities Had an Effect on Libor? by Jens Christensen in Federal Reserve Bank of San Francisco Economic Letter , August 2009

In response to turmoil in the interbank lending market, the Federal Reserve inaugurated programs to bolster liquidity beginning in December 2007. Research offers evidence that these liquidity facilities have helped lower the London interbank offered rate, a key market benchmark, significantly from what it otherwise would have been expected to be.

Macroprudential Supervision of Financial Institutions: Lessons from the SCAP by Beverly Hirtle, Til Schuermann, and Kevin Stiroh in Federal Reserve Bank of New York Staff Reports , November 2009

A fundamental conclusion drawn from the recent financial crisis is that the supervision and regulation of financial firms in isolation—a purely microprudential perspective—are not sufficient to maintain financial stability. Rather, a macroprudential perspective, which evaluates and responds to the financial system as a whole, seems necessary, and t...  

Paulson’s Gift by Pietro Veronesi and Luigi Zingales in NBER Working Paper , October 2009

The authors calculate the costs and benefits of the largest ever U.S. Government intervention in the financial sector announced the 2008 Columbus-day weekend. They estimate that this intervention increased the value of banks’ financial claims by $131 billion at a taxpayers’ cost of $25 -$47 billions with a net benefit between $84bn and $107bn. B...  

Quantitative Easing—Uncharted Waters for Monetary Policy by James Bullard in Federal Reserve Bank of St. Louis Regional Economist , January 2010

A discussion of the use of quantiative easing in monetary policy

What the Libor-OIS Spread Says by Daniel L. Thornton in Federal Reserve Bank of St. Louis Economic Synopses , May 2009

This paper offers a discussion of the current Libor-OIS rate spread, and what that rate implies for the health of banks.

Possible Solutions / Next Steps

Addressing TBTF by Shrinking Financial Institutions: An Initial Assessment by Gary H. Stern and Ron Feldman in Federal Reserve Bank of Minneapolis , May 2009

In this essay, the authors review concerns about the "make-them-smaller" reform. They recommend several interim steps to address TBTF that share some similarities with the make-them-smaller approach but do not have the same failings. Specifically, they support (1) imposing special deposit insurance assessments for TBTF banks to allow for spillover-...  

Aiding the Economy: What the Fed Did and Why by Ben S. Bernanke in Board of Governors , November 2010

Federal Reserve Chairman Bernanke's Op-ed column published in The Washington Post on November 4, 2010

Are All the Sacred Cows Dead? Implications of the Financial Crisis for Macro and Financial Policies by Asli Demirgüç-Kunt and Luis Servén in World Bank Policy Research Working Paper , January 2009

The recent global financial crisis has shaken the confidence of developed and developing countries alike in the very blueprint of financial and macro policies that underlie the western capitalist systems. In an effort to contain the crisis from spreading, the authorities in the US and many European governments have taken unprecedented steps of prov...  

As In the Past, Reform Will Follow Crisis by James Bullard in Federal Reserve Bank of St. Louis Regional Economist , July 2009

Historically, crises have led to significant legislation. The current financial crisis will undoubtedly spur further regulation. Successful regulation should be aimed not at preventing all failures, but rather at establishing a clear and credible process such that if a failure were to occur, it would take place in an orderly fashion and not cause i...  

Asset Bubbles and Systemic Risk by Eric S. Rosengren in Federal Reserve Bank of Boston Speech , March 2010

The Global Interdependence Center's Conference on "Financial Interdependence in the World's Post-Crisis Capital Markets" Philadelphia, Pennsylvania

Bank Capital: Lessons from the Financial Crisis by Asli Demirguc-Kunt, Enrica Detragiache, Ouarda Merrouche in World Bank Policy Research Working Paper, WPS5473 , November 2010

Using a multi-country panel of banks, the authors study whether better capitalized banks fared better in terms of stock returns during the financial crisis.

Bank Relationships and the Depth of the Current Economic Crisis by Julian Caballero, Christopher Candelaria, and Galina Hale in Federal Reserve Bank of San Francisco Economic Letter , December 2009

The financial crisis has been worldwide in scope, but the severity has differed from country to country. Those countries whose banks played a more central role in the global financial system, were important intermediaries, or had extensive direct relationships tended to be less seriously affected, as measured by the extent of the decline in their s...  

Buying Troubled Assets by Lucian A. Bebchuk in Harvard Law and Economics Discussion Paper (via SSRN) , April 2009

This paper analyzes how government intervention in the market for banks’ troubled assets is best designed, and also uses this analysis to evaluate the public-private investment program announced by the U.S. government in March 2009. The author begins by presenting the case for using government funds to restart the market for troubled assets. He the...  

Can Monetary Policy Affect GDP Growth? by Yi Wen in Federal Reserve Bank of St. Louis Economic Synopses , April 2009

Discusses whether the growth of the monetary base is associated with gaster growth of real output.

Challenges for monetary policy in EMU by Axel Weber in Homer Jones Memorial Lecture , April 2011

Bundesbank President discussed the financial crisis and its lessons for monetary policy in a lecture at the St. Louis Fed.

The Changing Nature of Financial Intermediation and the Financial Crisis of 2007-09 by Tobias Adrian and Hyun Song Shin in Federal Reserve Bank of New York Staff Reports , March 2010

The financial crisis of 2007-09 highlighted the changing role of financial institutions and the growing importance of the “shadow banking system,” which grew out of the securitization of assets and the integration of banking with capital market developments. This trend was most pronounced in the United States, but it also had a profound influence o...  

The Consolidation of Financial Market Regulation: Pros, Cons, and Implications for the United States by Sabrina R. Pellerin, John R. Walter, and Patricia E. Wescott in Federal Reserve Bank of Richmond Working Paper , May 2009

The U.S. financial system has changed significantly over the last several decades without any major structural changes to the decentralized financial regulatory system, despite numerous proposals. In the past decade, many countries have chosen to consolidate their regulators into a newly formed "single regulator" or have significantly reduced the n...  

Cracks in the System: Repairing the Damaged Global Economy by Olivier Blanchard in International Monetary Fund: Finance and Development , December 2008

The financial crisis has exposed weaknesses in the current regulatory and supervisory frameworks, which have made clear that action is needed to reduce the risk of crises and to address them when they occur.

Credible Alertness Revisited by Jean-Claude Trichet in Federal Reserve Bank of Kansas City Symposium , August 2009

A discussion of three issues facing central banks: the relationship between asset prices and monetary policy; the effectiveness of the standard interest rate instrument; and the design of non-standar monetary policy measures such as the ECB's enhanced credit support.

Credit Derivatives: Systemic Risks and Policy Options by John Kiff, Jennifer Elliott, Elias Kazarian, Jodi Scarlata, and Carolyne Spackman in IMF Working Paper , November 2009

Credit derivative markets are largely unregulated, but calls are increasingly being made for changes to this “hands off” stance, amidst concerns that they helped to fuel the current financial crisis, or that they could be a cause of the next one. The purpose of this paper is to address two basic questions: (i) do credit derivative markets increase ...  

The Crisis by Alan Greenspan in Brookings Papers on Economic Activity , April 2010

To prevent a future financial crisis, the primary imperative must be increased regulatory capital and liquidity requirements on banks and significant increases in collateral requirements for globally traded financial products, irrespective of the financial institutions making the trades, Greenspan says. He offers his views about regulatory reform,...  

Emerging from the Crisis: Where Do We Stand? by Ben S. Bernanke in Board of Governors Speech , November 2010

Speech by Federal Reserve Chairman at the Sixth European Central Bank Central Banking Conference, Frankfurt, Germany

The Fed at a Crossroads by James Bullard in Federal Reserve Bank of St. Louis Speech , March 2010

Remarks at St. Cloud State University's 48th annual Winter Institute

Fed Confronts Financial Crisis by Expanding Its Role as Lender of Last Resort by John V. Duca, Danielle DiMartino and Jessica J. Renier in Federal Reserve Bank of Dallas Economic Letter , February 2009

The unprecedented actions the Fed has taken to combat the financial crisis have had some success in unclogging the economy's financial arteries, according to this article.

Federal Reserve Liquidity Programs: An Update by Niel Willardson and LuAnne Pederson in The Region (Federal Reserve Bank of Minneapolis) , June 2010

A review of the size, status and results of the Fed's programs to cope with crisis

The Federal Reserve's Asset Purchase Program by Janet Yellen in Speech at the The Brimmer Policy Forum, Allied Social Science Associations Annual Meeting, Denver, Colorado , January 2011

Yellen discusses the rationale for the decision by the Federal Open Market Committee (FOMC) in November 2010 to initiate a new program of asset purchases, and addresses questions (FAQs) regarding the program's economic and financial effects both in the U.S. and abroad.

The Federal Reserve's Liquidity Facilities by William C. Dudley in Speech , April 2009

Remarks at the Vanderbilt University Conference on Financial Markets and Financial Policy Honoring Dewey Daane, Nashville, Tennessee

The Federal Reserve's Policy Actions during the Financial Crisis and Lessons for the Future by Donald L. Kohn in Board of Governors Speech , May 2010

Speech at the Carleton University, Ottawa, Canada

The Financial Crisis and the Recession: What is Happening and What the Government Should Do by Robert E. Hall and Susan E. Woodward

Woodward and Hall frequently update a document on the crisis and recession. The highlights of the document are: Low interest rates in the early part of the decade were responsible monetary policy to head off deflation, not an irresponsible contribution to a housing price bubble. The most important fact about the economy today is the collapse of s...  

The Financial Crisis of 2008: What Needs to Happen after TARP by Campbell R. Harvey in Duke University Working Paper , October 2008

Harvey argues that the Trouble Asset Relief Program (TARP), signed into law on October 3, 2008, is an insufficient policy initiative to end the current credit crisis. In addition to modifications in implementing the program, other policy initiatives are necessary. Harvey sets forth several proposals to help end the crisis.

Fiscal Responsibility and Global Rebalancing by Janet L. Yellen in Federal Reserve Board of Governors , December 2010

Speech by Federal Reserve System Board of Governors Vice Chair at the Committee for Economic Development 2010 International Counterparts Conference, New York, New York .

The Future of Securities Regulation by Luigi Zingales in University of Chicago Working Paper , January 2009

The U.S. system of securities law was designed more than 70 years ago to regain investors’ trust after a major financial crisis. Today we face a similar problem. But while in the 1930s the prevailing perception was that investors had been defrauded by offerings of dubious quality securities, in the new millennium, investors’ perception is that they...  

The High Cost of Exceptionally Low Rates by Thomas M. Hoenig in Federal Reserve Bank of Kansas City , June 2010

Speech at Bartlesville Federal Reserve Forum

Implementing a Macroprudential Approach to Supervision and Regulation by Ben S. Bernanke in Federal Reserve Board of Governors Speech , May 2011

Speech at the 47th Annual Conference on Bank Structure and Competition, Chicago, Illinois

Implications of the Financial Crisis for Economics by Ben S. Bernanke in Board of Governors Speech , September 2010

Speech at the Conference Co-sponsored by the Center for Economic Policy Studies and the Bendheim Center for Finance, Princeton University, Princeton, New Jersey

Implications of the Financial Crisis for Potential Growth: Past, Present, and Future by Charles Steindel in Federal Reserve Bank of New York Staff Reports , November 2009

The scale of the recent collapse in asset values and the magnitude of the recession suggest that activities connected to the increase in values over the 2002-07 period—notably, expansion of the financial markets, homebuilding, and real estate—were overstated. If this is true, aggregate U.S. economic growth would have been overstated, implying that ...  

Improving the International Monetary and Financial System by Janet L. Yellen in Speech at the Banque de France International Symposium, Paris, France , March 2011

In this speech Yellen contributes her thoughts on steps we can take to improve our international economic order. In the case of the recent global financial crisis and recession, she apportions responsibility to inadequacies in both the monetary and financial systems.

It's Greek to Me by Kevin Warsh in Board of Governors Speech , June 2010

At the Atlanta Rotary Club, Atlanta, Georgia

The Lack of an Empirical Rationale for a Revival of Discretionary Fiscal Policy by John B. Taylor in AEA Presentation Paper , January 2009

Despite this widespread agreement of a decade ago, there has recently been a dramatic revival of interest in discretionary fiscal policy. The purpose of this paper is to review the empirical evidence during the past decade and determine whether it calls for such a revival. Taylor finds that it does not.

The macroeconomics of financial crises: How risk premiums, liquidity traps and perfect traps affect policy options by Manfred Gärtner und Florian Jung in University of St. Gallen Discussion Paper , July 2009

The paper shows that structural models of the IS-LM and Mundell-Fleming variety have a lot to tell about the macroeconomics of the current global crisis. In addition to demonstrating how the emergence of risk premiums in money and capital markets may drive economies into recessions, it shows the following: (1) Liquidity traps may occur not only whe...  

Monetary Policy Research and the Financial Crisis: Strengths and Shortcomings by Donald L. Kohn in Speech, Board of Governors , October 2009

Kohn, in his speech, asks "What aspects of the existing literature in monetary economics have been particularly helpful in formulating the course of monetary policy since the onset of the financial crisis? Second, what are the gaps in this literature that have become particularly evident since the onset of the financial crisis and, therefore, would...  

Monetary Policy Stance: The View from Consumption Spending by William T. Gavin in Federal Reserve Bank of St. Louis Economic Synopses , October 2009

The author suggests that we should expect a third business cycle in succession in which the real federal funds rate reaches its trough well after the economy begins to recover

Mortgage Choice and the Pricing of Fixed-Rate and Adjustable-Rate Mortgages by John Krainer in Federal Reserve Bank of San Francisco Economic Letter , February 2010

In the United States throughout 2009, the share of adjustable-rate mortgages among total mortgage originations was very low, apparently reflecting the attractive pricing of fixed-rate mortgages relative to ARMs. Government policy could have changed the relative attractiveness of the fixed-rate mortgages and ARMs, thereby shifting the market share o...  

Negating the Inflation Potential of the Fed’s Lending Programs by Daniel L. Thornton in Federal Reserve Bank of St. Louis Economic Synopses , July 2009

The Term Auction Facility (TAF), instituted in December 2007, was the first in a series of Fed lending facilities designed to allocate credit (and thus liquidity) to certain institutions and markets. The most recent of these lending facilities is the Term Asset-Backed Securities Loan Facility (TALF), which began operation in March 2009. Initiall...  

The New Shape of the Economic and the Financial Governance in the EU by Olli Rehn in Institute of International Finance , October 2010

Keynote Speech by EU Economic & Monetary Affairs Commissioner at The Annual Meeting Institute of International Finance

On the Record with Bernanke in PBS NewsHour Forum , July 2009

At a forum in Kansas City, Mo., Federal Reserve Chairman Ben Bernanke discussed the central bank's actions in handling the economic crisis, saying he did not want to be the Fed chief who "presided over the second Great Depression." Here is the full transcript of the forum, which was moderated by Jim Lehrer.

Paradise Lost: Addressing ‘Too Big to Fail’ (With Reference to John Milton and Irving Kristol) by Richard W. FIsher in Remarks before the Cato Institute’s 27th Annual Monetary Conference , November 2009

"In the words of Milton, I would say that regulation should be designed to enable financial institutions to be 'sufficient to have stood, though free to fall.'"

A Plan for Addressing the Financial Crisis by Lucian A. Bebchuk in Harvard Law School Working Paper , September 2008

This paper critiques the proposed emergency legislation for spending $700 billion on purchasing financial firms’ troubled assets to address the 2008 financial crisis. It also puts forward an alternative for advancing the two goals of the proposed legislation – restoring stability to the financial markets and protecting taxpayers.

Preventing Future Crises by Noel Sacasa in International Monetary Fund: Finance and Development , December 2008

This article takes a look at substantive issues in the current debates on reforming the financial sector. The first section identifies crucial weaknesses that the reforms need to address, and the second outlines key areas for policy action.

The Public Policy Case for a Role for the Federal Reserve in Bank Supervision and Regulation by Ben S. Bernanke in Board of Governors , January 2010

The Board's views on the importance of the Federal Reserve's continued role in bank supervision and regulation. The document discusses (1) how the expertise and information that the Federal Reserve develops in the making of monetary policy enable it to make a unique contribution to an effective regulatory regime, especially in the context of a more...  

Rebalancing the Global Recovery by Ben S. Bernanke in Board of Governors , November 2010

Speech by the Federal Reserve Chairman at the Sixth European Central Bank Central Banking Conference, Frankfurt, Germany

Regulating Systemic Risk by Governor Daniel K. Tarullo in Speech at the 2011 Credit Markets Symposium, Charlotte, North Carolina , March 2011

This speech addresses the implementation of the new statutory regime for special supervision and regulation of financial institutions whose stress or failure could pose a risk to financial stability.

The Regulatory Response to the Financial Crisis: An Early Assessment by Jeffrey M. Lacker in The Institute for International Economic Policy and the International Monetary Fund Institute , May 2010

Assessment of the regulatory response to this crisis will depend predominantly on how well it clarifies and places discernable boundaries around the federal financial safety net.

Remarks on "The Squam Lake Report: Fixing the Financial System" by Ben S. Bernanke in Board of Governors Speech , June 2010

At the Squam Lake Conference, New York, New York

Report on the Lessons Learned from the Financial Ccrisis with Regard to the Functioning of European Financial Market Infrastructures by European Central Bank in European Central Bank , April 2010

This report considers issues relating to the impact of the financial crisis on the functioning of European financial market infrastructures (FMIs), including systemically important payment systems, central counter parties, and securities settlement systems.

Second Chances: Subprime Mortgage Modification and Re-Default by Andrew Haughwout, Ebiere Okah, and Joseph Tracy in Federal Reserve Bank of New York Staff Reports , December 2009

Mortgage modifications have become an important component of public interventions designed to reduce foreclosures. In this paper, we examine how the structure of a mortgage modification affects the likelihood of the modified mortgage re-defaulting over the next year. Using data on subprime modifications that precede the government’s Home Affordable...  

Securitization Markets and Central Banking: An Evaluation of the Term Asset-Backed Securities Loan Facility by Sean Campbell, Daniel Covitz, William Nelson, and Karen Pence in Finance & Economic Discussion Series, #2011-16 , January 2011

This working paper studies the effects of the Term Asset-Backed Securities Loan Facility and finds that it lowered interest rate spreads for some categories of asset-backed securities but had little impact on the pricing of individual securities.

Seeking Stability: What's Next for Banking Regulation? by Simona E. Cociuba in Federal Reserve Bank of Dallas Economic Letter , April 2009

Cociuba reviews the Basel I regulatory framework, and then considers some of the improvements and shortcomings of Basel II. Cociuba then presents the example of Northern Rock to illustrate the shortcomings of Basel I, before considering what the future of bank regulation should look like.

Still More Lessons from the Crisis by William C. Dudley in Federal Reserve Bank of New York Speech , December 2009

Remarks at the Columbia University World Leaders Forum, New York, New York

The Success of the CPFF? by Richard G. Anderson in Federal Reserve Bank of St. Louis Economic Synopses , April 2009

Describes the Commercial Paper Funding Facility and its effect on the availability of commercial credit.

Uncertainty About When the Fed Will Raise Interest Rates by Michael W. McCracken in Federal Reserve Bank of St. Louis Economic Synopses , June 2009

In response to the current economic crisis, the Federal Reserve has reduced its federal funds rate (FFR) target to zero. With the FFR at zero and a negative rate practically infeasible, the Fed is now in largely uncharted territory when conducting monetary policy. Other types of policies are now the focus of attention.

What's Under the TARP? by Craig P. Aubuchon in Federal Reserve Bank of St. Louis Economic Synopses , April 2009

This article provides an outline of the TARP plan and the Financial Stability Plan.

Will Regulatory Reform Prevent Future Crises? by James Bullard in Federal Reserve Bank of St. Louis Speech , February 2010

Remarks at CFA Virginia Society, Richmond, Virginia

Will the U.S. Bank Recapitalization Succeed? Lessons from Japan by Takeo Hoshi and Anil K. Kashyap in NBER Working Paper , December 2008

The U.S. government is using a variety of tools to try to rehabilitate the U.S. banking industry. The two principal policy levers discussed so far are employing asset managers to buy toxic real estate securities and making bank equity purchases. Japan used both of these strategies to combat its banking problems. There are also a surprising number o...  

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123 Financial Crisis Essay Topic Ideas & Examples

Inside This Article

The financial crisis of 2008 was a turning point in global economics, bringing about widespread economic turmoil and impacting millions of people around the world. As a result, it has become a popular topic for essays and research papers in various fields of study. If you are looking for inspiration for your next financial crisis essay, here are 123 topic ideas and examples to consider:

• The causes of the 2008 financial crisis
• The role of subprime mortgages in the financial crisis
• The impact of the financial crisis on the housing market
• The role of banks in the financial crisis
• The impact of the financial crisis on small businesses
• The impact of the financial crisis on unemployment
• The role of government regulation in preventing future financial crises
• The impact of the financial crisis on retirement savings
• The role of the Federal Reserve in responding to the financial crisis
• The impact of the financial crisis on global trade
• The role of credit rating agencies in the financial crisis
• The impact of the financial crisis on consumer confidence
• The role of the stock market in the financial crisis
• The impact of the financial crisis on government debt
• The role of financial derivatives in the financial crisis
• The impact of the financial crisis on student loans
• The role of corporate greed in the financial crisis
• The impact of the financial crisis on income inequality
• The role of monetary policy in responding to the financial crisis
• The impact of the financial crisis on healthcare costs
• The role of the housing bubble in causing the financial crisis
• The impact of the financial crisis on the automotive industry
• The role of the European debt crisis in exacerbating the financial crisis
• The impact of the financial crisis on social welfare programs
• The role of the Dodd-Frank Act in preventing future financial crises
• The impact of the financial crisis on the gig economy
• The role of quantitative easing in responding to the financial crisis
• The impact of the financial crisis on government spending
• The role of inflation in exacerbating the financial crisis
• The impact of the financial crisis on college tuition costs
• The role of student loan debt in the financial crisis
• The impact of the financial crisis on retirement age
• The role of financial literacy in preventing future financial crises
• The impact of the financial crisis on healthcare access
• The role of income inequality in causing the financial crisis
• The impact of the financial crisis on consumer spending
• The role of the shadow banking system in the financial crisis
• The role of government bailouts in responding to the financial crisis
• The impact of the financial crisis on the renewable energy sector
• The role of corporate debt in exacerbating the financial crisis
• The role of financial institutions in causing the financial crisis
• The impact of the financial crisis on mental health
• The role of income inequality in exacerbating the financial crisis
• The role of government stimulus packages in responding to the financial crisis
• The impact of the financial crisis on the education system
• The impact of the financial crisis on the healthcare industry
• The role of the automotive industry in causing the financial crisis
• The impact of the financial crisis on government revenue
• The role of corporate greed in exacerbating the financial crisis
• The impact of the financial crisis on the real estate market
• The impact of the financial crisis on the banking sector
• The role of credit default swaps in causing the financial crisis

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The Global Financial Crisis has been a watershed event not only for the United States and many advanced economies but also emerging markets (EM) around the world. The subprime crisis that began in the summer of 2007 was triggered by deteriorating quality of U.S. subprime mortgages. This rapidly propagated across different asset classes and financial markets. Increased delinquencies on subprime mortgages, driven by rising interest rates for refinancing and falling house prices, resulted in uncertainty surrounding the value of a number of structured credit products which had these assets in their underlying portfolios. As a result, rating agencies downgraded many of the related securities and announced changes in their methodologies for rating such products. Meanwhile, structured credit mortgage-backed instruments saw rapid price declines, and the liquidity for initially tradable securities in their respective secondary markets evaporated.

The losses, downgrades, and changes in methodologies shattered investors’ confidence in the rating agencies’ abilities to evaluate risks of complex securities, a result of which, investors pulled back from structured products in general. With interbank markets across various advanced economies becoming dysfunctional in early August 2007, there was clear evidence of a run for “quality” by investors. Financial markets more generally showed signs of stress, as investor preference moved away from complex structured products in a flight to quality and liquidity, and global investors’ risk appetite sharply decreased due to a widespread re- pricing of risk.

It soon became apparent that a wide range of different financial institutions had exposures to many of these mortgage-backed securities, often off-balance sheet entities such as conduits or structured investment vehicles (SIVs). Due to the increasing uncertainty with regard to their exposure to and the value of the underlying mortgage-backed securities, investors became unwilling to roll over the corresponding asset- backed commercial paper. As the problems with SIVs and conduits deepened, banks came under increasing pressure to rescue those that they had sponsored by providing liquidity or by taking their respective assets onto their own balance sheets. As a result, the balance sheets of those financial institutions were particularly strained by this re-absorption, which in addition was amplified by losses due to declining asset values.

Many European banks that had large exposures to US asset-backed securities had difficulties accessing wholesale funding, inducing subsequent market illiquidity in different market segments. The US subprime crisis increasingly became one of insolvency, as banks such as Northern Rock, IKB, and Bear Stearns had to be rescued. Due to the major importance of the interbank money market, central banks in turn intervened by reducing interest rates and providing additional liquidity to the markets in order to reduce pressures.

The Lehman Brothers collapse in September 2008 was the watershed event that unleashed a full-blown systemic crisis with global risk aversion dramatically increasing, asset markets across countries and regions plunging and the unwinding of carry trades that saw high- yielding EM currencies sharply depreciate within a short period of time. The interbank market became even more exposed to counterparty and liquidity risk, leading market participants to globally withdraw from these market segments.

Volatility also spilled over into the foreign currency markets with the carry trades starting to rapidly unwind at the end of September 2008. High-yielding and previous investment currencies saw large depreciations against the U.S. dollar, while funding currencies such as the Japanese yen benefited by a repatriation of funds into Japan. There was a scramble for U.S. dollars.

EM countries were less affected during the initial stages of the subprime crisis than advanced economies, as for example EM equity markets peaked in November 2007. But the persistence of the market dislocations, the deterioration of economic fundamentals in advanced economies and rising global risk aversion significantly affected EM countries by late 2008 after the Lehman Brothers collapse. Even EM countries with sound macroeconomic and financial pre-conditions, built-up over the previous years, have been strongly affected by the financial contagion that in late 2008 spilled over to the real sector with export and GDP growth rates plunging and trade finance sharply contracting across the world.

Against the backdrop of the above short narrative of the beginning of the crisis (see chapter III for more details), the first four chapters of the open access book focus on the origins and early phase of the Global Financial Crisis as well as spillovers and contagion:

Chapter I (published in 2008) with Nathaniel Frank and Brenda Gonzalez-Hermosillo examines the linkages between market and funding liquidity pressures, as well as their interaction with solvency issues surrounding key financial institutions during the 2007 subprime crisis.

Chapter II (published in 2009) with Nathaniel Frank examines the effectiveness of central bank interventions during the early phase of the crisis by focusing on the Federal Reserve (Fed) and the European Central Bank (ECB). It provides evidence that central bank interventions had a statistically significant impact on easing stress in unsecured interbank markets during the first phase of the subprime crisis which began in July 2007. But the economic magnitudes of the central bank interventions have overall not been very large.

Chapters III and IV focus on spillovers and contagion of the Global Financial Crisis. Specifically, chapter III (first published in 2009) with Nathaniel Frank looks at the financial spillovers to EMs by examining potential financial linkages between liquidity and bank solvency measures in advanced economies and EM bond and stock markets. The findings at the time indicate that the notion of possible de-coupling (in the financial markets) had been misplaced. While EM stock markets reached their peak in the last quarter of 2007, interlinkages between funding stress and equity markets in advanced economies and EM financial indicators were highly correlated and have seen sharp increases during specific crisis moments then.

Following that, chapter IV (first published in 2009) with Brenda Gonzalez-Hermosillo examines several key global market conditions, such as a proxy for market uncertainty and measures of interbank funding stress, to assess financial volatility and the likelihood of crisis. Using Markov regime-switching techniques, it shows that the Lehman Brothers failure was a watershed event in the crisis, although signs of heightened systemic risk could be detected as early as February 2007. In addition, the chapter analyzes the role of global market conditions to help determine when governments should begin to exit their extraordinary public support measures.

The next book chapters narrow down on a number of (geographical) case studies during and after the Global Financial Crisis:

Chapter V (first published in 2009) with Tao Sun examines financial stability issues that arise from the increased presence of sovereign wealth funds (SWFs) in global financial markets by assessing whether and how stock markets react to the announcements of investments and divestments to firms by SWFs using an event study approach. Based on 166 publicly traceable events collected on investments and divestments by major SWFs during the period from 1990 to 2009, results show that there was no significant destabilizing effect of SWFs on equity markets, which is consistent with anecdotal evidence.

Chapter VI (first published in 2010) with Adolfo Barajas, Ralph Chami and Raphael Espinoza focuses on the credit stagnation during the Global Financial Crisis in the Middle Eastern and North African (MENA) countries from three analytical angles. First, it finds that, similar to other regions and to its past history, a credit boom preceded the current slowdown, and that a protracted period of sluggish growth was likely going forward. Second, it uncovers a key role played by bank funding (deposit growth and external borrowing slowed considerably) but whose effect was frequently dampened by expansionary monetary policy. Third, bank-level fundamentals–capitalization and loan quality–helped to explain differences in credit growth across banks and countries. The chapter concludes on what policy measures could have been taken to revive credit growth in the MENA region.

Chapter VII (published in 2012) examines the case of Romania, which had been significantly impacted by the Global Financial Crisis. The chapter looks at foreign bank deleveraging and examines how Romania’s asset prices have been impacted from European crisis spillovers.

With European banks at the centre during the Global Financial Crisis, chapter VIII (published in 2013) with Nadege Jassaud looks at the balance sheet repair of European banks and the progress with bank restructuring at that time. The chapter specifically discusses the hurdles that impair restructuring and resolution that were present during the 2012/ 2013 European FSAP.

The next three chapters focus on the important aspect of bank stress testing. The Global Financial Crisis has clearly shown the shortcomings of stress testing but also its importance in examining financial stability and helping form policy recommendations.

Neglecting liquidity risks has come at a substantial price during the Global Financial Crisis. Over the last decade, large banks became increasingly reliant on short-term wholesale funding to finance their rapid asset growth. At the same time, funding from non-deposit sources (such as commercial paper placed with money-market mutual funds) soared. With the unfolding of the Global Financial Crisis, when uncertainties about the solvency of certain banks emerged, various types of wholesale funding market segments froze, resulting in funding or liquidity challenges for many banks. In the light of this experience, there is a widespread consensus that banks’ extensive reliance on deep and broad unsecured money markets is to be avoided. In this regard, chapter IX (published in 2012) with Christian Schmieder, Benjamin Neuendorfer, Claus Puhr and Stefan Schmitz presents a framework to run system-wide, balance sheet data-based liquidity stress tests. The liquidity framework includes a module to simulate the impact of bank-run type scenarios, a module to assess risks arising from maturity transformation and rollover risks, and a framework to link liquidity and solvency risks.

Stress testing has become an essential and very prominent tool in the analysis of financial- sector stability and the development of financial-sector policy, but in itself can have only a limited impact unless it is tied to action. Stress testing and related simulations can serve various functions, such as the calibration of the relative importance of various risk factors, and the assessment of banks’ capital needs when they are already under stress. The publication of stress-test results with enough supporting material (including on the initial condition of banks) can be helpful in reducing uncertainty; even banks that are revealed to be relatively weak may benefit if the market paralysis engendered by great uncertainty is relieved. But stress tests are of value mainly when they are followed up by concrete and swift actions by the authorities (supervisory and others) and by bank managers that improve the condition of banks and of banks’ clients. In this regard, chapter X (published in 2013) with Daniel Hardy discusses the role of European-wide stress tests.

One of the challenges of financial stability analysis and bank stress testing is how to establish scenarios with meaningful macro-financial linkages, i.e., taking into account spillover effects and other forms of contagion. Chapter XI (first published in 2014) with Ferhan Salman and Christian Schmieder presents an analytical approach to simulate the potential impact of spillover effects based on the “traditional” design of macro-economic stress tests. Specifically, the chapter examines spillover effects observed during the financial crisis and simulates their impact on banks’ liquidity and capital positions. The outcome suggests that spillover effects have a highly non-linear impact on bank soundness, both in terms of liquidity and solvency.

The final two chapters XII and XIII examine some aspects of debt sustainability and sovereign debt restructuring, namely the domestic financial stability implications from a face-value preserving maturity extension, so-called reprofiling as well as the role of banks’ home bias for sovereign debt sustainability:

Chapter XII (published in 2014) analyses the experience with past cases of reprofiling to assess whether they had destabilizing effects on the domestic banking system. It examines several past maturity extensions (Cyprus, Jamaica, Pakistan, and Uruguay) and finds that destabilizing effects did not materialize. Several factors contributed to the generally successful outcomes under maturity extensions: financial stability concerns were taken into account in the design of the restructuring and program strategy; banks mainly held their sovereign assets as held-to-maturity (HTM); a reprofiling was not assessed to be an impairment event requiring a write down of these assets (e.g., Cyprus, Jamaica); regulatory incentives for banks were provided (e.g., Jamaica or Uruguay); capital and liquidity support mechanisms were established (e.g., Jamaica) or were present (Cyprus); the amount of bank holdings of sovereign bonds in most cases was not very large; and some forbearance was used. The Jamaican case illustrates how a restructuring was designed to be light in order to ensure a limited impact on the financial system. The chapter also proposes possible measures that could help protect the banking system during a reprofiling and encourage participation by domestic banks in the exchange. Finally, the chapter examines financial stability implications of a creditor bailout. Although a reprofiling may have some disruptive effects, a bailout does not necessarily insulate the domestic financial system, as the Greek experience demonstrates.

Motivated by the recent increase in domestic banks’ holdings of domestic sovereign debt (i.e., home bias) in the European periphery, chapter XIII (published in 2015) with Tamon Asonuma and Said Bakhache analyzes implications of banks’ home bias for the sovereign’s debt sustainability. The main findings, based on a sample of advanced (AM) and EM economies, suggest that home bias generally reduces the cost of borrowing for AMs and EMs when debt levels are moderate to high. A worsening of market sentiments appears to dimish the favorable impact of home bias on cost of borrowing particularly for EMs. In addition, for AMs and EMs, higher home bias is associated with higher debt levels, and less responsive fiscal policy. The findings suggest that home bias indeed matters for debt sustainability: Home bias may provide fiscal breathing space, but delays in fiscal consolidation may actually delay problems until debt reaches dangerously high levels.

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What Is a Financial Crisis?

What causes a financial crisis, financial crisis examples, the 2008 global financial crisis, the 2020 financial crisis, the bottom line.

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Financial Crisis: Definition, Causes, and Examples

Gordon Scott has been an active investor and technical analyst or 20+ years. He is a Chartered Market Technician (CMT).

Investopedia / Jiaqi Zhou

In a financial crisis, asset prices see a steep decline in value, businesses and consumers are unable to pay their debts, and financial institutions experience liquidity shortages. A financial crisis is often associated with a panic or a bank run  during which investors sell off assets or withdraw money from savings accounts because they fear that the value of those assets will drop if they remain in a financial institution.

Other situations that may be labeled a financial crisis include the bursting of a speculative financial bubble , a stock market crash , a sovereign default , or a currency crisis . A financial crisis may be limited to banks or spread throughout a single economy, the economy of a region, or economies worldwide.

Key Takeaways

• Banking panics were at the genesis of several financial crises of the 19th, 20th, and 21st centuries, many of which led to recessions or depressions.
• Stock market crashes, credit crunches, the bursting of financial bubbles, sovereign defaults, and currency crises are all examples of financial crises.
• A financial crisis may be limited to a single country or one segment of financial services, but is more likely to spread regionally or globally.

A financial crisis may have multiple causes. Generally, a crisis can occur if institutions or assets are overvalued and can be exacerbated by irrational or herd-like investor behavior. For example, a rapid string of selloffs can result in lower asset prices, prompting individuals to dump assets or make huge savings withdrawals when a bank failure is rumored.

Contributing factors to a financial crisis include systemic failures, unanticipated or uncontrollable human behavior, incentives to take too much risk, regulatory absence or failures, or contagions that amount to a virus-like spread of problems from one institution or country to the next . If left unchecked, a crisis can cause an economy to go into a recession or depression. Even when measures are taken to avert a financial crisis, they can still happen, accelerate, or deepen.

Financial crises are not uncommon; they have happened for as long as the world has had currency. Some well-known financial crises include:

• Tulip Mania (1637). Though some historians argue that this mania did not have so much impact on the Dutch economy, and therefore shouldn't be considered a financial crisis, it did coincide with an outbreak of bubonic plague which had a significant impact on the country. With this in mind, it is difficult to tell if the crisis was precipitated by over-speculation or by the pandemic.
• Credit Crisis of 1772. After a period of rapidly expanding credit, this crisis started in March/April in London. Alexander Fordyce, a partner in a large bank, lost a huge sum shorting shares of the East India Company and fled to France to avoid repayment. Panic led to a run on English banks that left more than 20 large banking houses either bankrupt or stopping payments to depositors and creditors. The crisis quickly spread to much of Europe. Historians draw a line from this crisis to the cause of the Boston Tea Party—unpopular tax legislation in the 13 colonies—and the resulting unrest that gave birth to the American Revolution.
• Stock Crash of 1929 . This crash, starting on Oct. 24, 1929, saw share prices collapse after a period of wild speculation and borrowing to buy shares. It led to the Great Depression , which was felt worldwide for over a dozen years. Its social impact lasted far longer. One trigger of the crash was a drastic oversupply of commodity crops, which led to a steep decline in prices. A wide range of regulations and market-managing tools were introduced as a result of the crash.
• 1973 OPEC Oil Crisis. OPEC members started an oil embargo in October 1973 targeting countries that backed Israel in the Yom Kippur War. By the end of the embargo, a barrel of oil stood at $12, up from $3. Given that modern economies depend on oil, the higher prices and uncertainty led to the stock market crash of 1973–74, when a bear market persisted from January 1973 to December 1974 and the Dow Jones Industrial Average lost about 45% of its value.
• Asian Crisis of 1997–1998. This crisis started in July 1997 with the collapse of the Thai baht . Lacking foreign currency, the Thai government was forced to abandon its U.S. dollar peg and let the baht float. The result was a huge devaluation that spread to much of East Asia, also hitting Japan, as well as a huge rise in debt-to-GDP ratios. In its wake, the crisis led to better financial regulation and supervision.
• The 2007-2008 Global Financial Crisis. This financial crisis was the worst economic disaster since the Stock Market Crash of 1929. It started with a subprime mortgage lending crisis in 2007 and expanded into a global banking crisis with the failure of investment bank Lehman Brothers in September 2008. Huge bailouts and other measures meant to limit the spread of the damage failed and the global economy fell into recession.
• COVID19 Pandemic . A global stock market crash began in February 2020. From February 20 until March 23, 2020 the S&P 500 lost over 30% of its value. This was a result of the COVID-19 pandemic, which caused widespread panic and uncertainty about the future of the global economy. Despite being severe and with global reach, markets and national economies rebounded quickly and by early April 2020, the S&P 500 had began a decisive rise, surpassing its pre-pandemic high in August 2020.

The 2008 Global Financial Crisis remains one of the deepest economic downturns in modern history and deserves special attention, as its causes, effects, response, and lessons are still relevant to the current financial landscape.

Loosened Lending Standards

The crisis was the result of a sequence of events, each with its own trigger and culminating in the near-collapse of the banking system. It has been argued that the seeds of the crisis were sown as far back as the 1970s with the Community Development Act, which required banks to loosen their credit requirements for lower-income consumers, creating a market for subprime mortgages .

The amount of subprime mortgage debt, which was guaranteed by Freddie Mac and Fannie Mae , continued to expand into the early 2000s when the Federal Reserve Board began to cut interest rates drastically to avoid a recession. The combination of loose credit requirements and cheap money spurred a housing boom, which drove speculation, pushing up housing prices and creating a real estate bubble.

A financial crisis can take many forms, including a banking/credit panic or a stock market crash, but differs from a recession, which is often the result of such a crisis.

Complex Financial Instruments

In the meantime, the investment banks, looking for easy profits in the wake of the dot-com bust and 2001 recession, created collateralized debt obligations (CDOs) from the mortgages purchased on the secondary market. Because subprime mortgages were bundled with prime mortgages, there was no way for investors to understand the risks associated with the product. When the market for CDOs began to heat up, the housing bubble that had been building for several years had finally burst. As housing prices fell, subprime borrowers began to default on loans that were worth more than their homes, accelerating the decline in prices.

Failures Begin, Contagion Spreads

When investors realized the CDOs were worthless due to the toxic debt they represented, they attempted to unload the obligations. However, there was no market for the CDOs. The subsequent cascade of subprime lender failures created liquidity contagion that reached the upper tiers of the banking system. Two major investment banks, Lehman Brothers and Bear Stearns, collapsed under the weight of their exposure to subprime debt, and more than 450 banks failed over the next five years. Several of the major banks were on the brink of failure and were rescued by a taxpayer-funded bailout.

The U.S. Government responded to the Financial Crisis by lowering interest rates to nearly zero, buying back mortgage and government debt, and bailing out some struggling financial institutions. With rates so low, bond yields became far less attractive to investors when compared to stocks. The government response ignited the stock market. By March 2013, the S&P bounced back from the crisis and continued on its 10-year bull run from 2009 to 2019 to climb to about 250%. The U.S. housing market recovered in most major cities, and the unemployment rate fell as businesses began to hire and make more investments.

New Regulations

One big upshot of the crisis was the adoption of the Dodd-Frank Wall Street Reform and Consumer Protection Act , a massive piece of financial reform legislation passed by the Obama administration in 2010. Dodd-Frank brought wholesale changes to every aspect of the U.S. financial regulatory environment, which touched every regulatory body and every financial services business. Notably, Dodd-Frank had the following effects:

• More comprehensive regulation of financial markets, including more oversight of derivatives, which were brought into exchanges.
• Regulatory agencies, which had been numerous and sometimes redundant, were consolidated.
• A new body, the Financial Stability Oversight Council , was devised to monitor systemic risk.
• Greater investor protections were introduced, including a new consumer protection agency (the Consumer Financial Protection Bureau ) and standards for "plain-vanilla" products.
• The introduction of processes and tools (such as cash infusions) is meant to help with the winding down of failed financial institutions.
• Measures meant to improve standards, accounting, and regulation of credit rating agencies.

In February of 2020, the COVID19 virus was discovered in China. The disease soon made its way around the world, killing millions and stoking fear. This, in turn, caused markets to fall and credit to the financial system to grind to a halt.

The pandemic resulted in strict lockdowns and travel restrictions, which had a significant impact on global supply chains, consumer demand, and financial markets. Investors became increasingly concerned about the economic consequences of the pandemic, leading to a rapid sell-off in stock markets around the world. The crash was particularly severe in March 2020, when the Dow Jones Industrial Average (DJIA) experienced its worst day since 1987, falling over 2,000 points in a single day. Other major stock indexes, such as the S&P 500 and the FTSE 100, also experienced significant losses. From February 12 through March 23, 2020, the DJIA lost 37% of its value.

Central banks and governments around the world responded with various measures to stabilize the financial system and support the economy, including monetary stimulus and fiscal policies such as government spending and tax breaks.

Despite the severity of the initial crash, the markets rebounded somewhat in the following months, and many investors saw significant gains toward the end of 2020 and into 2021, where markets hit new all-time highs. However, the long-term economic consequences of the pandemic are still unclear, and many industries and countries are still struggling to recover fully.

A financial crisis is when financial instruments and assets decrease significantly in value. As a result, businesses have trouble meeting their financial obligations, and financial institutions lack sufficient cash or convertible assets to fund projects and meet immediate needs. Investors lose confidence in the value of their assets and consumers' incomes and assets are compromised, making it difficult for them to pay their debts.

A financial crisis can be caused by many factors, maybe too many to name. However, often a financial crisis is caused by overvalued assets, systemic and regulatory failures, and resulting consumer panic, such as a large number of customers withdrawing funds from a bank after learning of the institution's financial troubles. Some believe that financial crises are an inherent feature in how modern capitalist economies function, where the business cycle fuels speculative growth during economic booms, only to be met by contractions and recession. During these contractions, borrowers default on their loans and creditors tighten their lending criteria.

What Are the Stages of a Financial Crisis?

The financial crisis can be segmented into three stages, beginning with the launch of the crisis. Financial systems fail, generally caused by system and regulatory failures, institutional mismanagement of finances, and more. The next stage involves the breakdown of the financial system, with financial institutions, businesses, and consumers unable to meet obligations. Finally, assets decrease in value, and the overall level of debt increases.

What Was the Cause of the 2008 Financial Crisis?

Although the crisis was attributed to many breakdowns, it was largely due to the bountiful issuance of sub-prime mortgages, which were frequently sold to investors on the secondary market. Bad debt increased as sub-prime mortgagors defaulted on their loans, leaving secondary market investors scrambling. Investment firms, insurance companies, and financial institutions slaughtered by their involvement with these mortgages required government bailouts as they neared insolvency. The bailouts adversely affected the market, sending stocks plummeting. Other markets responded in tow, creating global panic and an unstable market.

What Was the Worst Financial Crisis Ever?

Arguably, the worst financial crisis in the last 90 years was the 2008 Global Financial Crisis, which sent stock markets crashing, financial institutions into ruin, and consumers scrambling.

A financial crisis occurs when asset prices drop steeply, businesses and consumers cannot pay their debts, and financial institutions experience liquidity shortages. Various factors contribute to a financial crisis, including systemic failures, unanticipated or uncontrollable human behavior, incentives to take excessive risks, regulatory absence or failures, or natural disasters such as pandemic viruses. Some of the historical examples of financial crises include Tulip Mania, the Credit Crisis of 1772, the Stock Crash of 1929, the 1973 OPEC Oil Crisis, the Asian Crisis of 1997-1998, and the 2008 Global Financial Crisis.

Barron's. " The Real Story of the Dutch Tulip Bubble Is Even More Fascinating Than the Myth You’ve Heard ."

Open Educational Resources, City University of New York. " The Destruction of the Tea and the Coercive Acts ."

Academia. " Chapter Twenty-Seven, The Credit Crisis of 1772/3 in the Atlantic World ," Pages 491-492.

Economic History Association. " The 1929 Stock Market Crash ."

Federal Reserve History. " Stock Market Crash of 1929 ."

Macrotrends. " Dow Jones - DJIA - 100 Year Historical Chart ."

Georgetown University Library. " Oil as a Stragetic Resource: Impact of the 1973 Oil Crisis on the Korean Peninsula ," Page 6.

Federal Reserve History. " Asian Financial Crisis: July 1997–December 1998 ."

Federal Deposit Insurance Corporation. " Crisis and Response: An FDIC History, 2008-2013: Overview ," Pages xiv, xxii

U.S. Congress. " S.3066 - Housing and Community Development Act of 1974 ."

Federal Reserve Bank of St. Louis, FRED Economic Data. " Federal Funds Effective Rate (FEDFUNDS) ," Select Date "December 2000 to August 2004."

ResearchGate. " Housing Policy, Subprime Markets and Fannie Mae and Freddie Mac: What We Know, What We Think We Know and What We Don’t Know ," Page 3.

U.S. Financial Crisis Inquiry Commission. " The Financial Crisis Inquiry Report ," Pages 127-129, 142.

Federal Deposit Insurance Corporation. " Bank Failures in Brief – Summary 2001 Through 2022 ."

U.S. Financial Crisis Inquiry Commission. " The Financial Crisis Inquiry Report ," Pages 8, 256, 325, 339-340, 435.

Federal Reserve Bank of St. Louis, FRED Economic Data. " Federal Funds Effective Rate (FEDFUNDS) ," Select Date "February 2007 to December 2009."

Federal Reserve Bank of St. Louis, FRED Economic Data. " S&P 500 (SP500) ," Select Date "June 8, 2013 to December 31, 2019."

Russell Sage Foundation Journal of the Social Sciences. " The Impact of the Dodd-Frank Act on Financial Stability and Economic Growth ."

Marketwatch. " S&P 500 Index ."

• Guide to Stock Market Crashes 1 of 26
• October: The Month of Market Crashes? 2 of 26
• How Do Investors Lose Money When the Stock Market Crashes? 3 of 26
• Timeline of U.S. Stock Market Crashes 4 of 26
• October Effect: Definition, Examples, and Statistical Evidence 5 of 26
• Financial Crisis: Definition, Causes, and Examples 6 of 26
• What Is a Circuit Breaker in Trading? How Is It Triggered? 7 of 26
• Plunge Protection Team (PPT): Definition and How It Works 8 of 26
• Tulipmania: About the Dutch Tulip Bulb Market Bubble 9 of 26
• Black Friday Stock Market Crash Overview 10 of 26
• Bank Panic of 1907: Causes, Effects, and Importance 11 of 26
• Stock Market Crash of 1929: Definition, Causes, Effects 12 of 26
• The Stock Market Crash of 1929 and the Great Depression 13 of 26
• What Is Black Tuesday? Definition, History, and Impact 14 of 26
• What Is Black Thursday? History, Significance, and Aftermath 15 of 26
• What Was the Stock Market Crash of 1987? What Happened and Causes 16 of 26
• Black Monday: Definition in Stocks, What Caused It, and Losses 17 of 26
• What Caused Black Monday, the 1987 Stock Market Crash? 18 of 26
• The 2007–2008 Financial Crisis in Review 19 of 26
• The Fall of the Market in the Fall of 2008 20 of 26
• Components of the 2008 Bubble 21 of 26
• Financial Regulations: Glass-Steagall to Dodd-Frank 22 of 26
• Consequences of the Glass-Steagall Act Repeal 23 of 26
• Lessons From the 2008 Financial Crisis 24 of 26
• Major Players in the 2008 Financial Crisis: Where Are They Now? 25 of 26
• Too Big to Fail Banks: Where Are They Now? 26 of 26

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Three Essays on Financial Crises and Economic Recessions

• Mohammad Dehghani
• Alliance Manchester Business School

Student thesis : Phd

• Asymmetric Co-fluctuations
• Efficient Market Hypothesis
• Correlation Irrelevance
• Adaptive Market Hypothesis
• S&P 500
• Rational Bubbles
• Negative Bubbles
• U.S. and U.K. Stock Markets
• Unobserved Components Model
• Asymmetric Fads Model
• Global Financial Crisis
• Great Recession
• Shortfall Spillovers
• Inefficient Plunges
• Friedman's Plucking Model
• Business Cycle Asymmetries
• Structural Break
• Dynamic Factor Model (DFM)
• Trend-Cycle Decomposition
• U.K. Productivity Puzzle
• U.S. Slow Recovery
• Real Output
• Unemployment Rate

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This has revealed the need to rethink fundamentally how financial systems are regulated and managed. The current implicit view behind economic models is that markets and economies are inherently stable, so by design, offer no immediate handle on how to think about or deal with a major systemic crisis. This dissertation aims to explore different policies and the extent to which they can act as tools to prevent financial crises. This includes current debates revolving around financial sector reforms as well as the key areas for policy action to reduce the risk of crises and address the weaknesses in the current regulatory and policy frameworks.

Could the Financial Crisis Have Been Avoided?

Although a number of developments helped trigger the 2007 financial crash, the most prominent one was the the prospect of significant losses on residential mortgage loans to subprime borrowers that became apparent shortly after house prices began to decline. Along with the structural weaknesses in the financial system, regulation as well as supervision, these triggers help propagate and amplify the initial shocks of the 2007 financial crisis. Following the inadequate regulation of financial innovation, a shadow banking system of structured vehicles was invented. As the shadow banking system constituted of institutions that did not take deposits, they were not thought to be susceptible to a run and were not regulated as tightly as banks. This resulted in the creation of overly complex credit products like the structured investment vehicle, a legal entity created by the banks to sell loans repackaged as bonds with high credit ratings whose assets were often securitised loans that turned out to be much riskier and less valuable than expected.

In the final report by the Financial Crisis Inquiry Commission, the panel determined that the crisis could have been avoided as there had been numerous warning signs that were ignored, among them: an explosion in risky subprime mortgage lending, an unsustainable rise in housing prices, widespread reports of unscrupulous lending practices, steep increases in homeowners’ mortgage debt and a spike in Wall Street firms’ trading activities, especially in high risk financial products. The report also called out the Bush and Clinton administrations, the current and previous Federal Reserve chairmen, and Treasury Secretary Timothy Geithner for allowing the crisis to happen and criticised bankers who got rich by creating trillions of dollars in risky investments (Financial Crisis Inquiry Commission, 2011). However, the conclusion was only supported by the 6 Democrats and was dissented by 4 Republicans on the panel, suggesting that the findings may have been affected by partisan politics and hence, may not be representative of the full situation.

Policy Options to Prevent Financial Crises

According to modern economic theory, information asymmetries and financial market failures are central in explaining macroeconomic fluctuations and financial crises (Estrada, 2011). As lenders know less than borrowers about the use of their funds and cannot compel borrowers to act in the lenders’ best interests, lenders can panic and withdraw their funds when they perceive increased risks, in the absence of adequate public regulation and safeguards. That can trigger much wider financial crises, with spiraling real-sector effects. Properly regulating the financial system is not an easy mission, especially if the underlying intention is to prevent financial crises. In order to mitigate the risks of another wide financial crisis, research has led me to identify three possible options that can be used for this purpose:

Monetary Policy

Macroeconomic Policy

The Role of Monetary Policy

Monetary policy is the policy laid down by the central bank, involving management of money supply and interest rates and is the demand side economic policy used by the government of a country to achieve macroeconomic objectives like inflation, consumption, growth and liquidity (The Economic Times, 2017). One of the main lessons of the crisis is that central banks cannot simply neglect asset price developments on the tacit understanding that no matter how large and unsustainable price trends might become, they will be able to intervene in the aftermath of a crash to sweep up the pieces. The crisis has shown how costly this understanding can be in terms of, first, distorting the incentives of asset market participants in the boom phase and, second, tolerating the build-up of financial imbalances that can grow so large that their eventual unwinding is close to impossible to tackle with the conventional tools of monetary policy after a crisis.

Before the 2008 financial crisis, the common view was that a central bank should not react to asset price movements, except to the extent that they affect forecasts for inflation and the output gap (Munoz and Schmidt-Hebbel, 2012). They would instead stand ready to respond if and when a collapse in the prices of some assets threatened its ability to meet its policy mandates. In the aftermath of the crisis, there are increasing calls for central banks to be more proactive in responding to signs that an asset bubble may have emerged. This notion is often described as an imperative to “lean against the wind”, meaning that the central bank should act to lower asset prices that, by historical standards, seem unusually high (Gourio, Kashyap and Sim, 2017).

To contribute to financial stability, the first idea is that monetary policy should attempt to directly control financial booms that may lead to a crisis. Given the relationship between relevant interest rates and asset prices, advocators of this strategy argue that central banks can raise their policy interest rate to prick asset bubbles (De Grauwe, Mayer and Lannoo, 2008). To do this, central banks need a sufficiently broad and reliable strategic framework that can analyse and detect risks to price stability in a timely fashion. This strategic framework should include indicators that can signal macroeconomic and financial imbalances when they are forming. For example, when an unsustainable asset boom is inflating, fuelled by excess credit creation, the strategic framework should encourage the central bank to “lean against the wind” of financial exuberance. By doing this, the central bank would be implementing a more restrictive monetary policy stance than one they would implement in less perturbed financial conditions.

In this respect, there is also a conviction growing within the central banking community that comprehensive monetary policy strategies that include a prominent role for money and credit considerations are better suited to “lean against the wind” (De Grauwe, Mayer and Lannoo, 2008). By giving more prominence to money and credit in their strategy, central banks can better identify the emergence of medium-term risks to macroeconomic stability that result from imbalances in both domestic and global markets. By incorporating money and credit conditions in their policy in a systematic way, central b anks can adopt a somewhat tighter policy stance in the face of an inflating asset market than they would otherwise pursue if they had been confronted with a similar macroeconomic outlook under more normal asset market conditions. However, the current economic structure has developed and changed since the paper was published 10 years ago, so the policy of “leaning against the wind” that may have been effective in the past, may not be as effective in the present day.

Among the disadvantages of using monetary policy to control financial risk is the possibility that this attempt may easily enter into conflict with other goals already entrusted to policymakers. This is because monetary policy as a tool is too blunt to prick bubbles effectively (Evans, 2009). For example, monetary policy cannot be targeted precisely, and will affect other financial and macroeconomic variables beyond just the set of asset prices in question. This means that the interest rate increase necessary to “lean against” a bubble may be so large as to exert a negative effect on output as the general level of prices may fall drastically in the long run (Stark, 2009). The possible conflict in the pursuit of the goals, in turn, may lead to a lack of accountability, since deviations from one goal could be justified in terms of the pursuit of other goals. More importantly, perhaps, is the fact that using monetary policy to contain asset bubbles can be interpreted as a commitment to smoothing out asset price fluctuations, thereby dampening market signals and creating moral hazard. In light of the challenges involved, we can see that monetary policy may not be suited for directly abating bubbles, and should therefore be focused on the primary goal of pursuing price stability..

At the same time, central banks should not underestimate the potency of monetary policy. It is true that in most cases a small change in the policy rate may not be sufficient to slow down those asset price bubbles that develop on the false expectation of very large future capital gains. However, recent research suggests that there are other channels through which changes in interest rates can affect asset prices. The first is the profitability of financial institutions that systematically borrow short and lend long (Gourio, Kashyap and Sim, 2017). These leveraged institutions are credit companies that borrow by issuing short term liabilities and use the proceeds of their borrowing to lend over the longer term, or to purchase assets that have a longer maturity. They use their capital as a partial guarantee for their business, with a larger proportion of their lending being financed by borrowing. Confronted with even marginal increase in the short-term borrowing costs, due to the increase in the policy rate, these institutions are forced to to borrow less and pay back their previous debt because the thin margins from which they profit would become even thinner or negative (Gourio, Kashyap and Sim, 2017). In doing so, they would probably have to sell the assets that they had purchased on the expectations of future price gains. In the end, the deleveraging process triggered by the policy induced restriction would ultimately exert a dampening effect on asset price growth.

Regulatory Reforms

Regulation is a rule or directive made and maintained by an authority. In the financial sector, it is a truism that financial regulation usually evolves most in response to crises (Richardson, 2012). Considering credit rating agencies, which were central participants in the global financial crisis, as a first example of how regulatory actions and inaction helped trigger the crisis, mortgage companies routinely provided loans to borrowers with little ability to repay those debts because they earned fees for each loan and they could sell those loans to investment banks and other financial institutions. Investment banks and other financial institutions then gobbled up those mortgages because they earned fees for packaging the mortgages into new securities and they could sell those new mortgage-backed securities (MBSs) to other financial institutions, including banks, insurance companies, and pension funds around the world (Richardson, 2012). These other financial institutions bought the MBSs because credit rating agencies said they were safe and by fuelling the demand for MBS and related securities, credit rating agencies encouraged a broad array of financial institutions to make the poor investments that ultimately toppled the global financial system. The 2008 financial crisis had exposed the weaknesses of the archaic and fragmented financial regulatory system. Financial institutions had exploited the crevices between regulatory agencies and no agency had overall responsibility for monitoring financial stability (Wessel, 2016). For example, even when risks were noticed, inconsistent mandates interfered with effective response. Thus, a new regulatory framework has to be developed to enhance the resilience of the global financial system while at the same time not jeopardizing the financial system’s flexibility and ability to fully support innovation and growth of the world economy.

In the US, the Dodd Frank Act requirements have made the financial system safer and more resilient (Dodd–Frank Wall Street Reform and Consumer Protection Act, 2010). First, big U.S. banks are in better shape now than they were at the time of the financial crisis, in large measure because regulators have forced them to hold bigger capital cushions, which means they can absorb bigger losses without endangering each other and the whole financial system (Dodd–Frank Wall Street Reform and Consumer Protection Act). Had today’s capital framework been in place in 2007, the largest, most complex financial institutions would have been required to hold roughly twice as much common equity as they actually did. With greater common equity, fewer banks would have needed government rescue. Now, periodic stress tests, supervised by regulators, have forced bank managers to prepare for worst-case scenarios. The fraction of loans that aren’t being paid is half what it was at its peak in 2010.

According to the International Monetary Fund: “Compared to the pre-crisis period, [U.S.] banks have strengthened their capital positions, including relative to their international peers, hold more liquid assets and are less levered.” (International Monetary Fund, 2015)

However, I believe that there is still a need for a tighter framework for the rest of the world, and there are still regulatory gaps to be filled in the US financial system. Firstly, supervision has to be more more effective. With the introduction of new regulations, it is difficult to overstate the importance of robust and efficient supervision. The supervision of complex firms needs to be more in depth than in the past and better accustomed to their risk profiles and business models. Supervisors in many countries need more resources, better training and the means to be truly effective. They should be in a position to be able to challenge banks’ management on the basis of sophisticated risk and market understanding.

Another important measure of the new regulatory regime will be to enhance transparency. In the immediate aftermath of the crisis, as a lack of transparency was widely identified both as a cause and of a catalyst during the crisis, progress had been made to address this deficiency (Ackermann, 2010). First, this means that in the securitization markets especially, efforts have to be taken to give investors better disclosure on the underlyings so that they can perform their own due diligence rather than simply rely on the judgement of rating agencies. Second, in the derivatives markets, trade repositories must be established. These will significantly enhance supervisors’ knowledge about exposures in these markets and about the distribution of risks in the financial system, making the market more transparent. Thirdly, stress tests have to be increasingly us ed. There is no doubt that the appropriateness of the scenarios simulated in the stress tests can be argued, but there is no denying, however, that it gives investors and counterparties an unprecedented level of detail on banks’ sovereign exposures, which in turn can contribute to a normalisation of the financing situation of banks.

Another important task in the new regulatory framework is to extend oversight to the shadow banking system. It has been widely documented that the rapid expansion of the shadow banking system was the underlying cause for the huge increase in the financial system’s leverage before the outbreak of the crisis (Ackermann, 2010). This means that the task of monitoring and, if need be, addressing similar developments in the future has not become any less important, and may be even more important now as the regulated part of the financial system is subject to stricter requirements. In the US, the introduced Financial Stability Oversight Council (FSOC) is tasked with identifying all financial companies that are relevant for financial stability, whether regulated or not, and will have powers to impose obligations on them (Dodd-Frank Wall Street Reform and Consumer Protection Act). However, most systemic risk supervisors in other countries unfortunately have no such powers.

Currently, even with Dodd Frank, the regulatory landscape still remains fragmented, resulting in gaps, overlaps and the potential for delayed responses to emerging risks, and should be simplified over time,” the IMF advises (International Monetary Fund, 2015). For example, the FSOC is flawed as it is composed of several independent regulators, some of which have mandates to focus on specific institutions or markets, not on stability of the overall financial system. Even after the FSOC reaches consensus on a policy, which can take a long time, it has limited power to force a federal regulatory agency to act. These gaps in regulatory oversight may leave the financial system vulnerable in the future as important financial institutions or activities remain largely unregulated even after Dodd Frank. Also, in the implementation of financial regulation, it is also important to note that there is always a trade off (Gourio, Kashyap and Sim, 2017). For example, if regulation is too light, it is highly likely that a financial catastrophe will occur. If the regulation is too tough however, the economy will be starved of credit and experiences slow economic growth.

The Development of Macroprudential Policies

Macroprudential policies are typically designed to increase the financial system’s resilience, thus reducing the systemic risks arising from financial intermediation (Bank For International Settlements, 2017). A macroprudential approach recognizes the importance of general equilibrium effects, and seeks to safeguard the financial system as a whole. In the aftermath of the crisis, there seems to be an agreement among both academics and policymakers that financial regulation needs to move in a macroprudential direction. In the simplest terms, the macroprudential approach to financial regulation can be categorized as an effort to control the social costs associated with excessive balance sheet shrinkage on the part of multiple financial institutions hit with a common shock.

It could be argued that macroprudential policies may succeed in shoring up macroeconomic stability but only at the cost of excessively curbing economic activity and long-term growth. In other words, there might be a trade off between stability and sustainable prosperity. The more stable economies could better sustain and foster economic growth. This perspective is especially relevant from a policy viewpoint consistent with the greater appreciation of externalities and market failures (International Monetary Fund, 2013). This paper however, does not quantify the trade off between stability and sustainable prosperity. This then makes it difficult to determine how much stability economies have to achieve before they should start experimenting with macroeconomic policies.

There are actually many dimensions to having a macroprudential approach, varying from better identifying risks, to building more robust institutional infrastructures, to adopting new, system-oriented policies aimed at reducing excessive procyclicality and risks, and designing the institutional framework for operating them. The starting point and most complex issue, is to better understand the dimensions of systemic risks and have associated warning signals. Macroprudential supervision will fill an important gap in the supervisory architecture of the financial system. A regular analysis of the resilience of the financial system as a whole, of interconnectedness and issues of procyclicality is a long overdue and valuable component of financial supervision (Ackermann, 2010). While the institutional framework for the new systemic risk supervisors is now in place due to regulatory reforms, the operational framework is not. The new bodies will quickly need to achieve credibility in the markets by virtue of the quality of their analyses and recommendations.

Despite much discussion and some tentative steps forward, as of yet, approaches remain largely microprudential. For the most part, Basel III, developed after the financial crisis, is microprudentially oriented (Basel Committee on Banking Supervision, 2010). It appropriately targets the quantity and quality of bank capital as these institutions’ lack of good capital made them vulnerable during the crisis. However, more capital only helps cushion an individual institution’s losses. This means that the systemic nature of multiple and simultaneous bank distress is only partially addressed. As for liquidity risk, the determinants of the Net Stable Funding Ratio, one of the two liquidity risk components of Basel III are not yet finalized and various parts look watered down. The Liquidity Coverage Ratio and the Net Stable Funding Ratio also do not firmly counter banks’ potential to generate systemic liquidity risk ex ante, although with high enough ratios the chance of a systemic liquidity event is lessened. Even though there have been progress made through the Basel Committee, research has led me to believe that it is too backwards-looking to be fully effective. For example, it assumes that the securities which have been risky in the past are the same as the securities which will be risky in the future and does not account for future advancements and developments in the financial market.

An attempt to uncover the effects of capital requirements was done (Clerc et al., 2014). They developed a model to analyze how capital requirements affects the steady state and the transmission of various types of shocks in an economy. There were three main results that stood out in their model. To start with, they found that there is an ideal level of capital requirements. Higher capital requirements reduce bank leverage and hence their risk of defaulting. Lower leverage means that banks, to a larger extent must be financed by equity, so banks’ funding costs increase with capital requirements. The banks will then likely pass on the higher funding costs to borrowers by extending less credit to a higher interest rate. This shows that there is an optimal level of capital requirements because too high levels imply that credit will be too restricted. The model, however, does not comment on what this optimal level of capital requirements is, or what it would be characterized by. Second, they found that the higher degree of leverage there is in banks, the more responsive the economy is to shocks. This implies that limited liability and deposit insurance constitute a potentially powerful channel of financial amplification. The third finding was that countercyclical adjustments of capital requirements may improve the benefits of high capital requirements. Following a shock and the release of the accumulated capital, the buffer is meant to sustain credit sup ply and keep rates down even though defaults by borrowers are increasing. However, in any case, if the buffer is too low, banks may still see a rise in funding costs, which will offset the intended impact of the adjustment of the countercyclical capital requirement. The most important thing to note is also that for regulatory capital requirements to matter, the level of capital in booms must be higher than the levels imposed by the market in recessions (Gourio, Kashyap and Sim, 2017). This is because of the often considerable uncertainty that prevails in periods of financial turmoil, resulting in the market demanding very high capital ratios in banks before their solvency is questioned.

Regarding macroprudential policies that can possibly be implemented, a broad distinction can be made between those that aim to reduce risks arising from procyclicality and those arising from interconnections. One way to categorize the different policy tools is to note that systemic risk and hence macroprudential policy, can be divided into two categories (Elliott, Feldberg and Lehnert, 2013). Firstly, structural risks are threats to the economy that are always present. Examples would be the “too big to fail” problem which may induce moral hazard and the implicit promise within money market mutual funds to repay investors at par on demand, which may make them prone to runs if uncertainty arises. Secondly, cyclical risks are threats that include asset price bubbles and rapid credit and leverage growth leaving the economy vulnerable to shocks.

Since the crisis, only a few macroprudential tools have been adopted and mostly only for banks. Notably, Basel III contains the countercyclical capital buffer to account for the procyclicality of credit extension and the systemically important capital surcharge that tries to address the overweight importance of too big to fail institutions (Basel Committee on Banking Supervision, 2010). However, the calibration and effectiveness of these surcharges, and macroprudential policies tools more generally, is yet to be fully determined, with the calibration mostly based on rough estimates so far. While countercyclical buffers have been used, notably in Spain, where the evidence suggests some effectiveness (Jiménez et al., 2012), they did not stop a banking crisis from occurring.

Many other tools, ranging from adjustments in loan-to-value ratios that act to limit real estate lending during booms to avoid busts to levies or taxes which reduce the incentives for wholesale funding or to offset the too big to fail subsidy, have been mentioned as potential macroprudential tools. Some of these have been studied for the effectiveness of various macroprudential tools in a cross-country context (International Monetary Fund, 2011), the use of macroprudential policies for mitigating real estate booms and busts (Crowe et al., 2013), and for cross-country work on how macroprudential policies affect banks’ riskiness (Claessens, Ghosh and Mihet, 2013). Results have shown that the tools are being developed in the correct direction as they attempt to put in place incentives that will lower systemic risks. Nonetheless, there is still much to be determined before their effective use can be assured, including their calibration to country characteristics and circumstances. This study has very valid methods of procuring data with a detailed analysis that is supported by the use of statistical tests. However, there are still limitations to studies of this magnitude. Since the data was collected via an extensive self-report survey, its reliability is dependent on the participants’ honesty, understanding, and ability to be introspective.The study by the International Monetary Fund provides a comprehensive empirical study and uses data that is supported by statistical testing. However, there are still limitations to this study. First, of the 49 countries tested, almost two-thirds were developed countries which are normally linked with higher financial stability in comparison to developing nations, and so the results of this study may be skewed. Second, the empirical analysis here also does not address the issue of cross-border arbitrage and the side-effects of applying macroprudential instruments.

Other essential elements of a macroprudential framework include issues of the regulatory governance – to determine who is in charge, including as regards to cross-border aspects and their relationships (Nier et al., 2011) and interactions with other policies, mainly microprudential, monetary, and fiscal policies. While the greater emphasis on macroprudential policies is promising, and some emerging market countries seem to have utilized such policies effectively, it may still be too early to rely on them heavily, as their costs, including indirect adverse effects on resource allocation, are not well known. This is critical in advanced economies with more sophisticated financial systems, where arbitrage and avoidance are serious problems. For example, Spain’s use of dynamic provisioning, an accounting technique designed to build up capital buffers in good times, did not stop the banking system from requiring a bailout (Jiménez et al., 2012). At the same time, credit markets are also closely interconnected, so restricting the market for mortgages may affect business credit in unintended ways. Another barrier to total reliance on macroprudential policies is also that although bubbles look obvious with hindsight, predicting them is tricky. Expecting regulators to identify bubbles in advance and then design rules to deflate them, may be optimistic, but if countries are to avoid repeating past mistakes, macroprudential regulations may need to become a small but growing permanent part of how they manage their economies.

In some of the advanced economies, controversially, regulators are experimenting with targeted rules to try to prevent specific markets from developing bubbles. Last year the Reserve Bank of New Zealand imposed higher loan-to-value ratios on mortgage lenders (Reserve Bank of New Zealand, 2016). Concerned that property prices were rising unsustainably, this move limited the flow of credit to buyers. So far the experiment has proven a success, with growth in property prices quickly tapering off, without harming the rest of the economy. Similarly the Bank of England, worried about rapidly rising property prices, announced new restrictions on the size of mortgages relative to borrowers’ incomes (Bank of England, 2014). The overall efficiency of these tools, however, is still uncertain. It will hence remain important to not rely on macroprudential policies too much and complement them with tools such as banking system stress tests, which can also be viewed as a macroprudential tool from certain aspects.

At the same time, the introduction of macroprudential policies alone will be insufficient to limit systemic risk. These macroprudential policies need to be strictly enforced, which requires that administrators be empowered to act without interference from vested interests. And they need to be supported by sound macroeconomic policies to manage the economic cycle. Additionally, corporate governance reform is needed to limit systemic risk at the source, by requiring bank managers to act in the interests not only of bank shareholders, but also of the bank’s stakeholders at large. An important step in this direction, apart from bail in mechanisms that will improve market discipline, is that capital requirements be substantially higher in good times when excessive risk is taken (Crowe et al., 2013). The limitation to this paper however, is that they also do not comment on the optimal level of capital requirements, and so does not provide a proper guideline to determine this level. Incentives are also crucial, and corporate governance and market discipline are essential, including through capital requirements, compensation structures, and bail-in and resolution procedures. This means that a lot depends on the strength and independence of the macroprudenti al authority and the risk attitude of the public at large toward boom-bust cycles. Moreover, political economy constraints will also continue to plague the resolution of too big to fail institutions during a systemic financial crisis, the creation of new, optimal regulation measures, and also enforcing the new regulations in the booms. Therefore, macroprudential policies should focus on the prevention of financial crises through higher capital requirements, to use less short term debt finance in general (including households, not only firms), and to use these measures to tame the buildup of leverage and credit booms.

In conclusion, research has led me to believe that it may not be possible to prevent a repeat of the 2008 financial crisis. Although there has been much development and improvement in the efforts to mitigate risks in the financial market, with every macroeconomic policy option that I explored, I have found that there is still much work to be done to develop a tighter framework to be used by policymakers to control systemic risk. Conventional economics that would suggest using monetary policy to deflate financial bubbles through higher interest rates in the case of large rises in asset prices, has been found to have limitations in the financial market. This is because it is too broad and does not work with enough specificity, resulting in manifold spillovers in the wider economy and contraction in demand. I have also concluded that regulatory reforms since the crisis have undeniably improved the regulatory framework for financial markets but that there are still regulatory gaps in the financial systems that pose great threats to the financial market, and therefore an even tighter framework is still required. However, I have also concluded that macroprudential policies, a recent ongoing development since the 2008 financial crisis, can fill important gaps in the regulatory system of the financial market, mainly in supervision, and thus further strengthening the current regulatory reforms. It is also a sharper regulatory instrument, targeting the financial and asset market specifically. When implemented carefully, it can possibly reduce or even eliminate completely the unintended consequences of conventional monetary policy. Recent developments have led to a growing consensus among policymakers and economic researchers about the need to refocus the regulatory framework towards a macroprudential perspective. However, there is still much to be explored with macroprudential instruments as its complete effects are still uncertain, and there are more developments that can be made through deeper research and experimentation. This means that although there are positive prospects with the growth and progress of this tool, policymakers will have to ensure that these macroprudential policies are complemented with other regulatory tools to further strengthen the financial market, without forgetting to focus also on mitigating the effects of a large financial crisis, should it ever occur again.

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The Global Financial Crisis Essay

International finance is a study that entails the workings of the global financial system, exchange rates and foreign investment and how they impact international trade. International finance is a vital ingredient in the decision making process of many firms.

Every entity is faced with the inevitable reality of making financial decisions in the following departments; investment for instance where to open shop, dividends for example whether or not to pay and when, working capital management such as the amount of liquid cash to hold and in what currency and financing for instance the nature of the capital structure and where to source the money from. (Fender & Gyntelberg 2008 149).

The global financial crisis that was witnessed all over the world was the worst to be experienced. It resulted to the tumbling of large financial institutions, collapsing of stock markets and general decline in the wealth of consumers. This came about as a result of shortage of cash in the United States banking system hence eroding consumer confidence in its wake. All the economies worldwide were adversely affected as a result of decrease in the availability of credit and reduction in international trade (Jesse & Powers 2009 76).

Central Bank usually purchases foreign currency when it wants to increase the supply of its local currency. This is done to stem the shortage of local currency in the economy. During periods of inflation, Central Bank buys the local currency and sells foreign currency and in effect the money supply in the economy is reduced. (International Monetary Fund 2009 a 85)

The United States Federal Reserve together with Central Banks in the whole world were forced to increase money supplies in the economy to guard against aggravating an already awry situation. The United States Federal Reserve, the European Central bank, Bank of England and Bank of China had to act with unprecedented urgency to rescue their respective economies and that of the world at large.

They had to buy $2.5 trillion of government’s debt and struggling private assets from banks. The governments of the European countries and the United States raised the capital of their banking systems by $1.5 trillion through the buying of preferred stock in all their major banks (Levchenko et al. 2009 141).

The great recession that began in 2007 came to an end in June 2009. The financial crisis also came to an end almost at the same time. The president of the United States was quoted saying that the markets had become stable and that most of the money spent on the banks had been recouped.

In China, United States, England and most of European countries had their economies recover after the financial crisis validating the efforts that their governments had put towards guarding against the recession. There are exceptions nonetheless; countries such as Greece and Spain were not so lucky hence they had to be bailed out for the second time or their economies risked being battered to oblivion. (International Monetary Fund 2009b 48)

In grappling with issues to do with financial crisis like how much money to inject into their economies, the Central Banks had to contend with the issue of not injecting too much money into the economy resulting to inflation.

The United States Federal Reserve did not agree on this view and they injected more money into their economy than any other Central Bank. Central Banks were justified to have done what they did. This is because the financial crisis was self-inflicted hence it needed such extreme measures to alleviate it and thus what they did was approved.

Fender, I. & Gyntelberg, J., 2008. Overview: Global Financial Crisis Spurs Unprecedented Policy Actions. BIS Quarterly Review . Vol 6: 1–24.

International Monetary Fund., 2009. Review of Recent Crisis Programs . Washington, DC: IMF

International Monetary Fund., 2009. World Economic Outlook : Washington, DC: IMF.

Jesse,M. & Powers W., 2009. Did Trade Credit Problems Deepen the Great Trade Collapse? In The Great Trade Collapse: Causes, Consequences and Prospects . New York, NY: VoxEU.org Ebook.

Levchenko, A. et al., 2009. “The Collapse of International Trade During the 2008–2009 Crisis: In Search of the Smoking Gun.” Research Seminar in International Economics Discussion Paper. Vol 592.

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How to deal with money struggles during a financial crisis

Jannese Torres-Rodriguez

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This story comes from Life Kit , NPR's podcast to help make life better — covering everything from exercise to raising kids to making friends. For more, sign up for the newsletter .

Navigating a financial crisis can be overwhelming. How do you decide what expenses should be prioritized? Should you tap into your retirement accounts? What about asking friends or family for financial help? Should you apply for a payday loan?

The first step of creating your emergency plan is understanding your essential needs. "Traditionally, financial experts say, 'Try to pay all your bills, pay them on time.' And we just drill that into people's heads until they lose their job." says personal finance columnist Michelle Singletary."When you don't have enough income, you just pay for what you need, a roof over your head and food on a table."

Her new book, What To Do With Your Money When Crisis Hits: A Survival Guide , is an emergency field guide for your money. It's intended to help you tackle the issues you'd likely face in the event of a job or income loss, which many people experienced during the ongoing pandemic.

"There are plenty of great personal finance books out there," says Singletary. "But when you're in the middle of a crisis, when you're trying to figure out what to pay, you're not going to grab a book on retirement savings and read it, you know, 200 pages of that."

In the book, Singletary also explains her approach to managing money like she's in a perpetual recession. It's not so much about living in fear but more about being prepared to face financial crises at all times. "I have to always be prepared for the worst and hope for the best," she says.

Life Kit spoke with Singletary about her new book and advice on navigating financial crises. Highlights from our conversation are below, edited for brevity and clarity.

Jannese Torres-Rodriguez: One of the first places that people might turn to for financial support is friends and family. When is the right time to ask for a loan versus a financial gift?

Michelle Singletary: There is never a right time to ask for a loan. If you're in a financial crisis, go to the people who love you and care for you and say, "I've lost my job. I don't know when I can pay you back. I don't want to make a promise that I'm going to break and hurt our relationship." I think you, people will be surprised at the number of folks in their life that would be absolutely willing to help.

Emotions, Money, And What It Means To Be 'Financially Whole'

What is the best way to respond when someone asks you for financial help?

If you find yourself on this side of the conversation, relieve people of that need to pay you back. Whenever anybody approaches me, I say right away, "this is not a loan." If I write them a check, I write on the memo line in capital letters, NOT A LOAN. Just as a reminder to them that it's OK that you came to me. I had the resources. I wouldn't give you what I can't afford. I release them of that obligation and we never speak about it again. If you're going to help someone, don't keep bringing it up, because if you do, the person feels like they have to pay you back. So just don't say anything.

If You're Drowning In Debt, There's A Way Out

People might be tempted to turn to predatory lending options like payday loans or title loans. Why should we avoid these at all costs?

Payday loans are loans that are given to people based on their next paycheck. Title loans use your vehicle's title as collateral to guarantee the loan. What happens in that situation is say you've got a car that's worth $5,000 and you borrow $500, but you default on that? Now they take your $5,000 for that $500 loan.

Title loans are particularly dangerous for two reasons. One, when you look at the fees and you annualize those fees and turn them into an interest rate, you will see that those fees translate to interest rates of anywhere from 300 percent to 1000 percent. If you were in trouble and someone said, "Hey, I'm going to lend you money at 300 percent," you wouldn't do it. Two, if you're in a jam and you don't have enough money now, you're pledging money from your next paycheck, you're already behind. How are you going to catch up? Studies show that many people end up in a debt cycle with these loans.

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What are your thoughts on taking 401k loans or early withdrawals from your retirement accounts in order to make ends meet?

In the book, I talk about where to go before you reach that point. But if you've tapped everybody that you could or there is nobody to tap, if you have no savings, then that is a source of money that you can tap. It's not ideal. I'd hope and pray that you don't have to do it. But if you do, go ahead and do it, because sometimes you gotta do what you got to do. Now, don't take a lot of the money. Take it little by little as you need it.

Can you walk us through the order of succession when it comes to who you should be talking to, what resources you should be accessing when you're in a financial crisis?

First, go through all of your savings — all of it. That's why it's there. Then, go to friends and family and ask them to help you out. Many churches, synagogues and religious organizations have funds that they set aside for members in need. Tap into state and federal funds, apply for unemployment benefits if necessary, apply for welfare, Medicaid. Use those resources. That's why they're there. If none of that is available, then you can tap your retirement funds. It's going to cost you. But it's there.

Spend Savvier, Save Smarter: 5 Tips To Stop Stress-Spending

I think there's a lot of confusion around whether an emergency fund is enough as far as savings go. How many types of savings accounts should people have in order to be able to adequately deal with emergencies?

I like to have my money in different savings "pots." It is a way to organize my savings and also prevent me from tapping money that I shouldn't be tapping. I have something called a "Life happens pot," which is different from the emergency fund. "Life happens" is the pot of money for when life happens, like your car breaks down. That's the pot that you reach for in those situations, because a lot of times, people don't have the emergency funds when they get in a crisis because they've been dipping into it.

People are always asking me, "I've got all this money, but it just is not earning anything." That's not that money's purpose. Don't worry about that. Its job is to be there risk-free. I make sure that I'm investing and getting growth in my other "pots" of money like my retirement account and my children's college fund.

How To Save For Your Kid's College Education

What are common financial scams that we should look out for?

In many communities, particularly minority communities, there are Ponzi and pyramid schemes like the sou-sou, which is a savings technique that many immigrants use where people pool their money and somebody gets the pot of savings every month. Now, people have used that to create these pyramid schemes where, say, you put in five hundred and they promise you four thousand dollars. If they say "I can guarantee you return," you are about to be scammed. Scammers know that people feel like they're behind the curve. They know that people are anxious to grow their money. They know that people are behind in savings. And so they're eager to find a quick fix, a quick way to make money. And they play on that. They play on your trust.

It's A Good Time To Save More. Here's How

Do you have any final words of advice?

I don't want you to feel guilty. I want you to feel energized. I want you to feel motivated. Don't just say, "Oh, that's right," and then go back and do the same thing. Take it slow. I'm telling you a whole bunch of stuff that requires a lot of money and discipline. Once you develop that habit, when you start to make money or you get back on track, then it'll become easier, because you have more money at hand. All of us will encounter some sort of financial emergency. And if you're prepared next time around, you can find yourself in a much better situation.

The audio portion of this episode was produced by Clare Marie Schneider. Engineering support was provided by Patrick Murray.

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• Life Kit: Money

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Adam Dobrinich