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    liquidity programs

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    The Federal Reserve under Chairman Bernanke was very aggressive in trying to cope with or manage the financial crisis that hit the U.S. in 2007 and 2008.

    Why do you think the Federal Reserve acted so aggressively?

    What â??traditionalâ? monetary policies (three standard Fed policies) were enacted by the Fed and what did those policies attempt to do?

    Can you think of any â??newâ? policies that were enacted by the Fed to manage the crisis? Briefly discuss one of these policies and its objective

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    Solution Preview

    As to the first question, I will leave that to you to develop your own opinion. There is no wrong answer here, it is simply a "what do you think" situation.

    As far as what the Fed did:

    They initially created liquidity programs in order to immediately address some of the issues that were seen as causing the slowdown/recession. The financial crisis was accelerated in large part by a liquidity shortfall in nearly all major financial markets as well as the corresponding loss of confidence in illiquid market participants. In normal times, the Federal Reserve uses two primary methods to inject liquidity into markets: open market operations and discount window lending. In the extraordinary circumstances of the financial crisis, however, these tools alone were insufficient, in both reach and magnitude, to create the liquidity and confidence needed to stabilize markets. Therefore, the Federal Reserve created many new programs - in some cases under statutory authority that can only be invoked in unusual and exigent circumstances - to provide the liquidity needed to slow the crisis and prevent financial meltdown. While certain aspects of their effects may be subject to debate, it is generally believed that these programs were instrumental in averting crisis.

    Programs supporting banks
    The crisis began when financial firms started becoming concerned about the financial condition of other financial firms?it was essentially a modern-day, broad-based "run." This was due, in part, to the burst of the housing bubble, which created worries about the quality of mortgage loans that banks and other firms had made, as well as mortgage-backed securities they owned or were selling. Starting in the fall of 2007, rates of interbank loans with maturity terms of one month or longer rose to very high levels. the difference between the 3-month LIBOR and comparable U.S. Treasuries?rose from a normal level of around 50 basis points (a basis point is one-hundredth of a percentage point) to about 150 basis points and then in ...

    Solution Summary

    Actions by the Federal Reserve are assessed in this tutorial.