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The Financial Crisis: An Inside View

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  • Phillip Swagel

    (Georgetown University)

Abstract

This paper reviews the policy response to the 2007–09 financial crisis from the perspective of a senior Treasury official at the time. Government agencies faced severe constraints in addressing the crisis: lack of legal authority for potentially helpful financial stabilization measures, a Congress reluctant to grant such authority, and the need to act quickly in the midst of a market panic. Treasury officials recognized the dangers arising from mounting foreclosures and worked to facilitate limited mortgage modifications, but going further was politically unacceptable because public funds would have gone to some irresponsible borrowers. The suddenness of Bear Stearns’ collapse in March 2008 made rescue necessary and led to preparation of emergency options should conditions worsen. The Treasury saw Fannie Mae and Freddie Mac’s rescue that summer as necessary to calm markets, despite the moral hazard created. After Lehman Brothers failed in September, the Treasury genuinely intended to buy illiquid securities from troubled institutions but turned to capital injections as the crisis deepened.
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Suggested Citation

  • Phillip Swagel, 2009. "The Financial Crisis: An Inside View," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 40(1 (Spring), pages 1-78.
    • Handle: RePEc:bin:bpeajo:v:40:y:2009:i:2009-01:p:1-78
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    File URL: https://www.brookings.edu/wp-content/uploads/2009/03/2009a_bpea_swagel.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    macroeconomics; financial crisis; U.S. government; Bear Stearns; Lehman Brothers; Fannie Mae; Freddie Mac;
    All these keywords.

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • N2 - Economic History - - Financial Markets and Institutions
    • G01 - Financial Economics - - General - - - Financial Crises

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