Government Interventions in Response to Financial Turmoil (CRS Report for Congress)
Premium Purchase PDF for $24.95 (44 pages)
add to cart or
subscribe for unlimited access
Pro Premium subscribers have free access to our full library of CRS reports.
Subscribe today, or
request a demo to learn more.
| Release Date |
Feb. 1, 2010 |
| Report Number |
R41073 |
| Report Type |
Report |
| Authors |
Baird Webel, Specialist in Financial Economics; Marc Labonte, Specialist in Macroeconomic Policy |
| Source Agency |
Congressional Research Service |
Summary:
In August 2007, asset-backed securities, particularly those backed by subprime mortgages, suddenly became illiquid and fell sharply in value as an unprecedented housing boom turned to a housing bust. Financial firms eventually wrote down these losses, depleting their capital. Uncertainty about future losses on illiquid and complex assets led to some firms having reduced access to private liquidity, with the loss in liquidity being fatal in some cases. In September 2008, the financial crisis reached panic proportions, with some large financial firms failing or having the government step in to prevent their failure. Initially, the government approach was largely an 'ad hoc' one, attempting to address the problems at individual institutions on a case-by-case basis. The panic in September 2008 convinced policy makers that a more system-wide approach was needed, and Congress created the Troubled Asset Relief Program (TARP) in October 2008. In addition to TARP, the Federal Reserve (Fed) and Federal Deposit Insurance Corporation (FDIC) implemented broad lending and guarantee programs. Because the crisis had so many causes and symptoms, the response tackled a number of disparate problems, and can be broadly categorized into programs that (1) increased financial institutions' liquidity; (2) provided capital directly to financial institutions for them to recover from asset write-offs; (3) purchased illiquid assets from financial institutions in order to restore confidence in their balance sheets; (4) intervened in specific financial markets that had ceased to function smoothly; and (5) used public funds to prevent the failure of troubled institutions that were deemed 'too big to fail' because of their systemic importance.
