A Financial Timeline
Articles & Papers

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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.

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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...   [ more ]

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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,...   [ more ]

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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...   [ more ]

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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.

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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.

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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

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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...   [ more ]

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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

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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.

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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.

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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.

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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...   [ more ]

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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.

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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.

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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...   [ more ]

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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...   [ more ]

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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.

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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?

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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...   [ more ]

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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 ...   [ more ]

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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...   [ more ]

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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...   [ more ]

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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...   [ more ]

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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

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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.

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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...   [ more ]

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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...   [ more ]

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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...   [ more ]

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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

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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...   [ more ]

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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

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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

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Monetary Policy and the Crisis

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.

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“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.

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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.

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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.

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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...   [ more ]

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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

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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 ...   [ more ]

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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.

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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.

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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...   [ more ]

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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.

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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...   [ more ]

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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

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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...   [ more ]

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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...   [ more ]

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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.

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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

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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...   [ more ]

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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...   [ more ]

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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.

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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...   [ more ]

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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...   [ more ]

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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 ...   [ more ]

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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.

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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 ...   [ more ]

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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 ...   [ more ]

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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,...   [ more ]

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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.

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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...   [ more ]

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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...   [ more ]

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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.

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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 ...   [ more ]

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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.

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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 ...   [ more ]

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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...   [ more ]

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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...   [ more ]

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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...   [ more ]

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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...   [ more ]

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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 ...   [ more ]

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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.

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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

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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...   [ more ]

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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...   [ more ]

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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...   [ more ]

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

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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...   [ more ]

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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...   [ more ]

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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.

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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...   [ more ]

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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.

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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.

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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.

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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 ...   [ more ]

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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.

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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...   [ more ]

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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.

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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...   [ more ]

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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

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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

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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...   [ more ]

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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.

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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.

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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

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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

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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...   [ more ]

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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

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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...   [ more ]

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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 ...   [ more ]

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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.

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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 ...   [ more ]

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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 ...   [ more ]

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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.

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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.

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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...   [ more ]

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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

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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"

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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...   [ more ]

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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...   [ more ]

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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.

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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.

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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...   [ more ]

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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.

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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-...   [ more ]

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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...   [ more ]

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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

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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...   [ more ]

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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

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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...   [ more ]

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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...   [ more ]

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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...   [ more ]

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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...   [ more ]

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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.

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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.

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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

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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

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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.

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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...   [ more ]

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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 ...   [ more ]

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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...   [ more ]

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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...   [ more ]

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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.

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Historical Perspectives on the Crisis

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...   [ more ]

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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...   [ more ]

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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 ...   [ more ]

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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

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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.

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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...   [ more ]

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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...   [ more ]

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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...   [ more ]

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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...   [ more ]

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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.

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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 ...   [ more ]

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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...   [ more ]

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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?

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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

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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

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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

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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...   [ more ]

[ back to top ]

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...   [ more ]

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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...   [ more ]

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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...   [ more ]

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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...   [ more ]

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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...   [ more ]

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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.

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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

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What Caused the Crisis

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.

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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.

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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...   [ more ]

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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 ...   [ more ]

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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.

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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...   [ more ]

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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...   [ more ]

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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...   [ more ]

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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.

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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.

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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 ...   [ more ]

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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

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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.

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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 ...   [ more ]

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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.

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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.

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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

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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.

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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...   [ more ]

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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...   [ more ]

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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.

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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

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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...   [ more ]

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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.

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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...   [ more ]

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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?

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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...   [ more ]

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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

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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. ...   [ more ]

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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

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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

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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.

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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...   [ more ]

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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

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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...   [ more ]

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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.

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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...   [ more ]

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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...   [ more ]

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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...   [ more ]

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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...   [ more ]

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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...   [ more ]

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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

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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...   [ more ]

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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...   [ more ]

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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.

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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...   [ more ]

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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...   [ more ]

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The Role of Subprime Mortgages

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.

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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...   [ more ]

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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.

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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...   [ more ]

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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.

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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 ...   [ more ]

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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

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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...   [ more ]

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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.

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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...   [ more ]

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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.

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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...   [ more ]

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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

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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...   [ more ]

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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

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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...   [ more ]

[ back to top ]

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...   [ more ]

[ back to top ]

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...   [ more ]

[ back to top ]

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...   [ more ]

[ back to top ]

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...   [ more ]

[ back to top ]

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...   [ more ]

[ back to top ]

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.

[ back to top ]

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.

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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...   [ more ]

[ back to top ]

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

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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-...   [ more ]

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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

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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...   [ more ]

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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...   [ more ]

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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...   [ more ]

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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

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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 ...   [ more ]

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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.

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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.

[ back to top ]

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...   [ more ]

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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.

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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...   [ more ]

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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...   [ more ]

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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.

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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...   [ more ]

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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.

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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...   [ more ]

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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.

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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,...   [ more ]

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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

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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...   [ more ]

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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...   [ more ]

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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.

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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.

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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...   [ more ]

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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.

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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...   [ more ]

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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 ...   [ more ]

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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,...   [ more ]

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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.

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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...   [ more ]

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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...   [ more ]

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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

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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

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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

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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.

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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.

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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.

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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

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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.

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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 ...   [ more ]

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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

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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

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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...   [ more ]

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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.

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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...   [ more ]

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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.

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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 .

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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

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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...   [ more ]

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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...   [ more ]

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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.

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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

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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.

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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

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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

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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 ...   [ more ]

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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.

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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...   [ more ]

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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.

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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.

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

At the Atlanta Rotary Club, Atlanta, Georgia

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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.

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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.

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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...   [ more ]

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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...   [ more ]

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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...   [ more ]

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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...   [ more ]

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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...   [ more ]

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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

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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...   [ more ]

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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...   [ more ]

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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

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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.

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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...   [ more ]

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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.'"

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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.

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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.

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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...   [ more ]

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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.

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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

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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"

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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.

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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.

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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

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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.

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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...   [ more ]

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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...   [ more ]

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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...   [ more ]

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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...   [ more ]

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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.

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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.

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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.

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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-...   [ more ]

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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...   [ more ]

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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...   [ more ]

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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

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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...   [ more ]

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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.

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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...   [ more ]

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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.

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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

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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

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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...   [ more ]

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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.

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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...   [ more ]

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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.

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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 ...   [ more ]

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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...   [ more ]

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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...   [ more ]

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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.

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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

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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

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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...   [ more ]

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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.

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