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fiscal policy, financial crisis 2008

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Many people today would consider the 2008, United States financial crisis a simple “malfunction” or “mistake”, but it was nothing close to that. The first release of GDP for the fourth quarter of 2007 were released in February 2008 and showed GDP increasing at a sluggish 0.6% annual rate. The 2008 financial crisis timeline began in March 2008, when investors sold off their shares of investment bank Bear Stearns because it had too many of the toxic assets. The simmering chaos in financial markets boiled over in mid-September 2008, when, in a matter of two days, Merrill Lynch was saved by a takeover by Bank of America, Lehman Brothers filed for bankruptcy protection, and the Fed announced that it was committing up to $85 billion to loans to rescue insurance giant AIG.

To try to encourage lending and re-establish the market for these securities, the Fed created the Term Asset-Backed Securities Loan Facility (TALF) in late November 2008 (although the first loans were made in March 2009), offering $200 billion to buy newly issued high-grade asset-backed securities.Finally, on December 16, 2008, after a long series of gradual reductions, the Fed dropped the taget federal-funds rate to a range of zero to 0.25%, where it remains almost two years later. Without government oversight like Dodd-Frank, they could create another global crisis. What should the Fed do over the coming years to keep inflation from getting out of control?4.

Later in March, the large investment firm Bear Stearns failed and the Fed provided a loan of $29 billion to JPMorgan Chase to allow it to take over Bear Stearns rather than shutting it down.As Figure 1 shows, the economy entered a free-fall in the second half of 2008, although the grim news was not seen in BEA releases until the February 2009 release initially estimated a 3.8% decline in GDP for the fourth quarter of 2008. The first reduction in the target runds rate was a large-for-its-time decline to 4.75% in September 2007, which was followed by two further quarter-point reductions, bringing the rate to 4.25% in December 2007. Once the funds rate was essentially at zero, the Fed embarked on two rounds of quantitative easing. Kimberly Amadeo has 20 years of experience in economic analysis and business strategy. They only approved the bill on Oct.1, 2008, after global stock markets almost collapsed.

(Financial markets were very nervous about banks at this point; any bank seen as needing Fed support might be subject to speculative attack in financial markets or even shunned by potential transaction partners if worries about its solvency were severe.) General Motors and Chrysler also eventually received funding through TARP.During the depth of the crisis in September and October, the issuance of new asset-backed securities had ground to a halt.

What effects will these large-scale asset purchases have on banks' reserves? This instability led to the crisis.

A second round of quantitative easing was announced in November 2010, with the purchase of an additional $750 billion of longer-term Treasury securities over the following nine months. One-time tax rebates such as those of ESA2008 are most likely to be added to savings or used to pay down debt by such consumers, meaning that they will not add much to aggregate demand. (The Federal Reserve Bank of Philadelphia compiles a Despite the lack of official GDP data indicating a recession, the Fed had lots of information by early 2008 supporting expansionary policy.

Unable to securitize loans, banks were beginning to restrict long-term lending through student loans, small-business loans, and mortgages, which put further downward pressure on aggregate demand. As Christina Romer discussed in her recent talk at Reed, current fiscal policy faces a tightrope between the need for further stimulus and the need to restrain the rapid growth of government debt.

Any of these three events would have been a financial-market tsunami; together they looked like the end of the world.

There is not yet a consensus among the researchers on which policy measure is more effective; however, the literature has shown that fiscal policy is more effective than monetary policy during financial crises, and therefore fiscal expansion may reduce output loss or shorten the of length crises (IMF, 2008a, 2008b; Baldacci, Gupta, & Mulas-Granados, 2009).
Contrary to what many believe, renowned economists and financial advisors regarded the financial crisis of 2007 and 2008 to be the most devastating crisis since the Great Depression of the 1930’s.

This involved the purchases of about $1 trillion of securities, both additional mortgage-backed securities and also longer-term Treasury bonds.

Beginning in 2008 many nations of the world enacted fiscal stimulus plans in response to the Great Recession.
In 2006, housing prices started to fall for the first time in decades. Indeed, a On March 11, 2008, the Fed created another extraordinary credit mechanism, the Term Securities Lending Facility (TSLF), allowing banks to exchange high-grade mortgage-backed securities for more-liquid Treasury bills for up to a month. On February 17, 2009, he signed the 

The Federal Reserve began pumping liquidity into the banking system via the 

By this time, the Fed had reached far beyond its usual practice of holding only government securities and liabilities of banks, engaging in emergency asset purchases wherever the latest fire might need to be extinguished.On October 3, 2008, after less than a fortnight of debate, Congress passed and President Bush signed the Emergency Economic Stabilization Act of 2008, which provided up to $700 billion for the Fed to purchase mortgage-backed securities and other assets through the Troubled Asset Relief Program (TARP). Conventional wisdom is mixed on whether such monetary expansions can be effective when short-term interest rates are already near zero.

They show the level and composition of the stimulus packages adopted, but no econometric analysis … The financial crisis of 2008 proved that banks could not regulate themselves. Economic theory suggests that households that have either ample savings or access to credit markets should base consumption spending on their lifetime income rather than just income in the current year.

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