Range of
Intervention Mechanisms
The list is organized by category
to emphasize the broad range of interventions, mechanisms, programs,
and policy changes. The media, politicians, and commentators have a
tendency to simply respond to the most recent proposal or action with
some reference to previous contrasting or comparable actions. This
loses the wide-angle view of the full array of interventions and leaves
an impression of a scatter shot policy response to the crisis. In fact,
the administration's programs, while often experimental and
evolving, are actually efforts to consciously bring every potentially
effecitve economic mechanism into play.
As summarized in the Economics
Primer web page on this
site there are fundamentally two types of policies the government can
implement to try to influence the level of economic activity: Monetary
policy and Fiscal policy. In some ways all of the actions taken by the
Bush and Obama administrations can be placed in one of these
categories.
However, due to the fact that many of the interventions taken are
uncommon, only implemented or even proposed during major crises (for
example nationalization) and due to the fact that many of the
interventions are experimental, evolving, and responding to entirely
new circumstances (for example credit default swaps) I think it is more
useful to separate out traditional Monetary and Fiscal policy responses
from the more unusual financial and regulatory interventions.
Additionally, given the nature of the problems in the financial and
housing sectors (for example, lack of proper risk assessment, lack of
transparency, and fraud in the case of Madoff Securities) and due to
the scale of the losses and interconnected nature of the financial
instruments the traditional Monetary and Fiscal responses have proven
to be or are likely to be relatively weak or ineffective.
Monetary Policy (and Federal
Reserve actions)
Interest
Rate Adjustments
From September 2007 to December 2008 the Federal Reserve cut the Federal Funds Rate
from 5.25 percent to a range of between .25 percent and 0.00
percent. The Federal Funds rate is the interest rate that banks with
deposits in the Federal Reserve Bank are allowed to charge each other
for overnight loans to keep their accounts in balance.
Simultaneously, the Federal
Reserve similarly cut the Prime Rate to
.50 percent. the Prime Rate is the interest rate that the Fed loans
money to its strongest depositor banks.
These are an extremely
aggressive actions given the rapid rate of decline of the interest
rates and the fact that it cannot go any lower than 0.00 percent. After
these actions the Federal Reserve cannot stimulate lending via interest
rate adjustments. This mechanism is now entirely exhausted.
Increases in
Liquidity
Because the Fed charges higher
rates to lend money than the banks are allowed to charge each other and
because borrowing from the Fed is often seen as a sign of weakness, the
Fed is usually a secondary lender to banks. The primary lenders are
other banks. In other words, normally the volume of money that banks
borrow from each other is far greater than the amount of money they
borrow from the Fed. However, because banks started to distrust each
other and inter-bank lending began to freeze up on 2008, the Federal
Reserve has become the primary lender to banks.
From late 2007 to late 2008 the Federal Reserve increased the amount of
money available to lend to banks and extended the loan period to 84
days from 24 hours. By the end of 2008 the Federal
Reserve had made available $900 billion to banks at the above reduced
interest rate (.5 percent for prime). This was a major expansion of
liquidity, the amount of money available to circulate in the economy.
Foreign
Currency Swaps
Since 1962 the Federal Reserve bank
coordinates loans (currency swap lines of credit) with Central banks of
other major economies. By the end of 2008, the Fed had loaned an
additional $500 billion to 14 foreign Central Banks to keep financial
institutions abroad liquid.
Non-Traditional (even Unprecedented)
Federal Reserve Actions
The magnitude and diversity of
nontraditional lending programs and
initiatives developed over the past year are unprecedented in Fed
history.
- Statement from the Federal Reserve
Bank of Minneapolis
Under the coordination of the U.S.
Treasury the Fed funded ($30 billion) the forced the acquisition of
Bear Stearns by JP Morgan Chase. With this action the Fed began to use
a rarely implemented intervention - lending money to enterprises that
were neither depositors in the Federal Reserve Banking System, nor even
commercial banks. Since then, it has expanded this "non-traditional
program" to extend loans to AIG, money market mutual funds,
commercial paper (private bonds), and others.
By the end of 2008 these
non-traditional credit prgrams amounted approximately $500 billion.
Along with the expanded credit to the banking system and the currency
swaps the Fed had more than doubled
(actually almost tripled) the most credit it had ever extended in
its history and it did this in a single year from August 2007 to
December 2008. The previous record for expansion of credit was a 60
percent increase from 1933 to 1934 during the deepest part of the Great
Depression and under Franklin D. Roosevelts' New Deal.
The Fed created a new we site
to provide info. specifically on its actions to address the financial
crisis. This site provides the complete and updated interventions the
Fed has engaged in: Credit and
Liquidity Programs and the Balance Sheet. It's daunting, but it is all
there.
Still under construction ...
Fiscal Policy
$787 ?
Economic Stimulus Package
Budgets
2009, 2010
Financial Interventions
Stimulus (Loans and Loan Guarantees)
Home
Mortgage
Auto industry
Share Purchases ...
TARP
BAC
Conservatorship, Receivership, Nationalization
Fannie
& Freddie
Bear-Stearns
AIG
Subsidized Purchase of Assets
Toxic
Assets: Public Private Investment Plan (mar. 24)
Regulatory
Changes
Regulatory Authority (mar. 25)
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