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.
Actions to Restore Financial Stability: A summary of recent Federal Reserve initiatives
by Niel Willardson
in The Region (Minneapolis Fed), December 2008
This article provides a summary of recent Federal Reserve initiatives designed to reestablish normal credit channels and flows in the wake of the current financial crisis.
Activist Fiscal Policy to Stabilize Economic Activity
by Alan J. Auerbach and William G. Gale
in Federal Reserve Bank of Kansas City Symposium, August 2009
This paper examines the effects of discretionary fiscal policy in the current financial crisis.
Bank Exposure to Commercial Real Estate
by Yuliya Demyanyk and Kent Cherny
in Federal Reserve Bank of Cleveland Economic Trends, August 2009
As rising home foreclosures and delinquencies continue to undermine a financial and economic recovery, an increasing amount of attention is being paid to another corner of the property market: commercial real estate. This article discusses bank exposure to the commercial real estate market.
Bankers Acceptances and Unconventional Monetary Policy: FAQs
by Richard G. Anderson
in Federal Reserve Bank of St. Louis Economic Synopses, March 2009
An expansion and FAQ following on an earlier article ("Bankers Acceptances: Yesterday's Instrument to Re-Start Today's Credit Markets?"). Describes possible implementation of a Banker's Acceptances program at the Federal Reserve.
Bankers’ Acceptances: Yesterday’s Instrument to Restart Today's Credit Markets?
by Richard G. Anderson
in Federal Reserve Bank of St. Louis Economic Synopses, January 2009
This note suggests considering an old—not new—financial market instrument: bankers’ acceptances. Bankers’ acceptances are one of the world’s older financial instruments, used as early as the twelfth century. Bankers’ acceptances have a long history in the Federal Reserve. Bankers’ acceptances are an old idea whose time may have returned—but with c... [ more ]
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 ]
Central Bank Exit Policies
by Donald L. Kohn
in Speech, Board of Governors, September 2009
Kohn briefly underlines some aspects of the Federal Reserve's framework for exiting the unusual policies put in place to ameliorate the effects of the financial turmoil of the past two years
Central Bank Response to the 2007-08 Financial Market Turbulence: Experiences and Lessons Drawn
by Alexandre Chailloux, Simon Gray, Ulrich Klüh, Seiichi Shimizu, and Peter Stella
in IMF Working Paper, September 2008
The paper reviews the policy response of major central banks during the 2007–08 financial market turbulence and suggests that there is scope for convergence among central bank operational frameworks through the adoption of those elements that proved most instrumental in calming markets. These include (i) rapid liquidity provision to a broad rang... [ more ]
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 ]
Commercial Bank Lending Data during the Crisis: Handle with Care
by Silvio Contessi and Hoda El-Ghazaly,
in Federal Reserve Bank of St. Louis Economic Synopses, August 2009
A discussion of commercial bank lending data, inferences that can be drawn from the data, and some caveats about the data.
Confronting Too Big to Fail
by Daniel K. Tarullo
in Speech, Board of Governors, October 2009
Tarullo suggests that the reform process cannot be judged a success unless it substantially reduces systemic risk generally and, in particular, the too-big-to-fail problem. This speech addresses the task of forging an effective response to this problem
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 ]
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.
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 ]
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 ]
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 ]
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 ]
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 ]
The Fed's Response to the Credit Crunch
by Craig P. Aubuchon
in Federal Reserve Bank of St. Louis Econoimc Synopses, January 2009
The Federal Reserve Board has used Section 13(3) of the Federal Reserve Act to create several new lending facilities to address the ongoing strains in the credit market.
The Fed, Liquidity, and Credit Allocation
by Daniel Thornton
in Federal Reserve Bank of St. Louis Review, January 2009
The current financial turmoil has generated considerable discussion of liquidity. Moreover, it has been widely reported that the Federal Reserve played a major role in supplying liquidity to financial markets during this distressed time. This article describes two ways in which the Fed has supplied liquidity since late 2007. The first is traditiona... [ more ]
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 ]
Federal Reserve Assets: Understanding the Pieces of the Pie
by Charles S. Gascon
in Federal Reserve Bank of St. Louis Economic Synopses, March 2009
This paper examines the composition of assets on the Fed’s balance sheet and groups them according to the objectives of the programs used to acquire them.
The Federal Reserve's Balance Sheet: An Update
by Ben S. Bernanke
in Speech, Board of Governors, October 2009
Bernanke reviews the most important elements of the Federal Reserve's balance sheet, as well as some aspects of their evolution over time. With this, he explains the steps the Federal Reserve has taken, beyond conventional interest rate reductions, to mitigate the financial crisis and the recession, as well as how those actions will be reversed as ... [ more ]
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 ]
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 ]
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 ]
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 ]
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 ]
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.
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 ]
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 ]
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 ]
How Not to Reduce Excess Reserves
by David C. Wheelock
in Federal Reserve Bank of St. Louis Economic Synopses, August 2009
The author looks back to a simliar economic situation during the 1930s for insights into how to handle excess reserves.
How the Subprime Crisis Went Global: Evidence from Bank Credit Default Swap Spreads
by Barry Eichengreen, Ashoka Mody, Milan Nedeljkovic, and Lucio Sarno
in NBER Working Paper (requires subscription), April 2009
How did the Subprime Crisis, a problem in a small corner of U.S. financial markets, affect the entire global banking system? To shed light on this question we use principal components analysis to identify common factors in the movement of banks' credit default swap spreads. We find that fortunes of international banks rise and fall together even... [ more ]
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.
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 ]
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.
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 ]
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.
More Lessons from the Crisis
by William C. Dudley
in Federal Reserve Bank of New York Speech, November 2009
Remarks at teh Center for Economic Policy Studies Symposium
More Money: Understanding Recent Changes in the Monetary Base
by William T. Gavin
in Federal Reserve Bank of St. Louis Review, March 2009
The financial crisis that began in the summer of 2007 took a turn for the worse in September 2008. Until then, Federal Reserve actions taken to improve the functioning financial markets did not affect the monetary base. The unusual lending and purchase of private debt was offset by the sale of Treasury securities so that the total size of the ba... [ more ]
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 ]
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 ]
Policies to Bring Us Out of the Financial Crisis and Recession
by Donald L. Kohn
in Speech, April 2009
Kohn discusses the actions the government is taking to address our current financial and economic difficulties, focusing on the economic and financial problems and policy responses in the United States.
Provision of Liquidity through the Primary Credit Facility during the Financial Crisis: A Structural Analysis
by Erhan Artuç and Selva Demiralp
in Federal Reserve Bank of New York Economic Policy Review, October 2009
In response to the liquidity crisis that began in August 2007, central banks designed a variety of tools for supplying liquidity to financial institutions. The Federal Reserve introduced several programs, such as the Term Auction Facility, the Term Securities Lending Facility, and the Primary Dealer Credit Facility, while enhancing its open market ... [ more ]
Reflections on a Year of Crisis
by Ben S. Bernanke
in Federal Reserve Bank of Kansas City Symposium, August 2009
The opening remarks at the Jackson Hole conference, "Financial Stability and Macroeconomic Policy"
Resolution Process for Financial Companies that Pose Systemic Risk to the Financial System and Overall Economy
by Thomas M. Hoenig, Charles S. Morris, and Kenneth Spong
in Federal Reserve Bank of Kansas City Speech, September 2009
The Under current law, financial regulators do not have the authority to resolve financial holding companies and non-depository financial companies that are in default or serious danger of default as they have with depository institutions. Although the normal bankruptcy process is a very effective process for most non-depository financial companie... [ more ]
The Risk of Deflation
by John C.Williams
in Federal Reserve Bank of San Francisco Economic Letter, March 2009
This article examines the risk of deflation in the United States by reviewing the evidence from past episodes of deflation and inflation.
The Role of the 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 ]
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 ]
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 ]
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 ]
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 ]
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 ]
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 ]
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.
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.
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 ]
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 ]
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.