The Fed intervened heavily during the 2008 credit crisis. Write a short essay explaining whether you believe the Fed’s intervention improved

The Fed intervened heavily during the 2008 credit crisis. Write a short essay explaining whether you believe the Fed’s intervention improved

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July 17, 2021
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The Fed’s Intervention during the Crisis

The Fed intervened heavily during the 2008 credit crisis. Write a short essay explaining whether you believe the Fed’s intervention improved conditions in financial markets or made conditions worse.

Answer and ExplanationSolution by a verified expert

Explanation
In the year 2008, the Fed expanded its role by lending out to different types of institutions. During March 2008, the discount window of the Fed provided funds to rescue Bear Stearns, a large securities firm that was almost on the verge of facing bankruptcy. The discount window of the Fed also provided loans to J.P. Morgan Chase on 16th March 2008, which was passed through Bear Stearns. It was done to ensure that there was a continuation in the clearing operations and liquidity problems were avoided.

On the day that followed, the role of the Fed extended further when it announced that it would provide emergency loans to around 20 primary dealers who served as a key financial intermediary for large Treasury securities' transactions in the secondary market. Another commitment was to provide loans up to $200 billion of Treasury securities to the primary dealers for a 28-day term and not overnight term. These provisions were made to calm the financial markets.

In 2008 and 2009, the Fed bought a huge amount of mortgage-backed securities to offset the reduction in the market demand for these securities because of the fear of the investors. The fear was triggered by the failure of Lehman brothers in the year 2008, which resulted in losses of investment in mortgages and mortgage-backed securities.

In November 2008, the Fed created term "asset-backed security loans" (known as TALF), providing financial institutions with finance when they bought high-quality bonds that were backed by consumer loans, credit card loans, or automobile loans. During the credit crisis, the market for these loans became inactive and the lenders were discouraged from making consumer loans because selling loans was not easy in the secondary market.

During 2008 and 2009, the Fed bought a huge amount of commercial paper, which it would normally not purchase, to offset the

decline in the market demand for commercial paper because of the fear of the investors to default

on commercial paper. Those fears were triggered by the failure of Lehman

Brothers, which caused it to default on the commercial paper that it had previously issued.

In the year 2010, the Fed also purchased a huge amount of long-term Treasury notes as well as bonds, which differed from the open market operations that mainly focused on buying short-term Treasury securities.

Sample Response
The Fed extended its lending windows by providing funds and loans, and buying mortgage-backed securities, commercial papers, and long-term securities to calm the financial markets during the credit crisis.

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