The fed provided secure reserves to bail out Bear Stearns. What is the Treasury Department and what role did it play when Bear Stearns was in financial trouble? It is where the money comes from; they were needed to make more money so they could pump it into the economy.
Secretary Paulson was concerned about "moral hazard" after helping Bear Stearns. What did this mean? Moral hazard means that there is no incentive for them to avoid the same mistakes because they though the government would bail them out again.
Ben Bernanke, Timothy Geithner and Henry Paulson have all said that they wished to rescue Lehman but that their hands were tied because Lehman did not have enough collateral to allow the government to provide a financial lifeline.
NARRATOR: Geithner saw what central bankers fear most, "systemic risk." Bear was frighteningly interconnected with other banks up and down Wall Street. Geithner picked up a phone at 4:00 in the morning and called his boss at the Federal Reserve, Ben Bernanke.
Bear Stearns was a global investment bank located in New York City that collapsed during the 2008 financial crisis. The bank was heavily exposed to mortgage-backed securities that turned into toxic assets when the underlying loans began to default.
March 16, 2008On March 16, 2008, Bear Stearns, the 85-year-old investment bank, narrowly avoids bankruptcy by its sale to J.P. Morgan Chase and Co. at the shockingly low price of $2 per share.
In the years since the collapse, the key regulators have claimed they could not have rescued Lehman because Lehman did not have adequate collateral to support a loan under the Fed's emergency lending power.
The Federal Reserve bails out Bear Stearns in a deal structured as a loan to JPMorgan, a bid to halt a run on the company and broker an orderly sale. It's the Fed's first loan to a nonbank since the Great Depression.
At its peak, AIG had a market capitalization four times the size of Lehman at the latter's highest. However, AIG was bailed out not purely because of its size, according to Antoncic.
4. Fed wanted to "purge speculative excess" -believed that depression was result of financial speculation, so Fed followed "liquidationist policy": allow price level to fall and weak banks/firms to fail before recovery could begin
A contagion of fear spread among depositors , starting from the agricultural areas, which had experienced the heaviest impact of bank failures in the twenties. But such contagion knows no geographical limits.
Banks will be forced to sell loans and securities to raise money to pay off depositors.
The fear of bad weather, which causes an increase in the prices of agricultural goods.
The 2007-2009 recession reduced tax revenues to the government.
1. Real interest rates would rise, real value of debts will increase
results from chronic government budget deficits and interest payments taking up an unsustainably large portion of government spending, and sever recession that increases govt spending and reduces tax revenues. Higher uncertainty leads to (increases/decreases) in spending. decreases.
The Fed was reluctant to rescue insolvent banks, believing that doing so would encourage risky behavior by bank managers ( the moral hazard problem).
Bank panics exacerbated the effects of the Great Depression by making residential and commercial loans more difficult to get, which further reduced economic activity.
Banks acquire information to decide if borrowers are creditworthy.
A recession that includes a financial crisis is generally more complex and has more severe consequences, such as decreasing asset prices and lending, which affects the economy for a longer time period than a traditional recession.
If multiple banks have to sell the same assets, the prices of those assets are likely to rise.
A central bank can act as a lender of last resort.
Banks have economies of scale or some other advantage in evaluating the riskiness of loans.
Banks can make riskier investments without worrying about deposit withdrawals because the government has insured depositors against losses.
Banks will be forced to sell loans and securities to raise money to pay off depositors.
The Federal Reserve acts as a lender of last resort.
Once housing prices started to fall, the banks that owned mortgaged-backed securities experienced losses.
The 2007-2009 recession reduced tax revenues to the government.
bank runs can cause good and bad banks to fail --> costly failures bc they reduce availability of credit to households and firms. Once a panic starts, falling income, employment, and asset prices can cause more bank failures.
A central bank can act as a lender of last resort.
2) When thousands of banks failed, it became difficult for their customers to obtain credit, thus exacerbating the severity of the Great Depression.
Not likely. The US has a complicated financial system that is intertwined with the housing market which makes finding the impact of a single factor very difficult. The bank of the United States was. One of the largest banks at the time, and it failed in December 1930, largely from falling real estate prices.
Yes. Some would argue that the bank of United States was not as interconnected as Friedman/Schwartz argue because there is not a lot of evidence that other bank failures were tied to this particular bank's failure
B - Depositors face the same fears now as in the early 1930s.
Former Federal Reserve Chair Ben Bernanke has observed that; "Even a bank that is solvent under normal conditions can rarely survive a sustained run."
A contagion of fear spread among depositors , starting from the agricultural areas, which had experienced the heaviest impact of bank failures in the twenties. But such contagion knows no geographical limits.
A - The 2007--2009 recession led to increased government spending.
A. The classic account of bank panics was published in 1879 by Walter Bagehot, editor of the Economist, in his book Lombard Street: open double quoteIn wild periods of alarm, one failure makes many, and the best way to prevent the derivative failures is to arrest the primary failure which causes them.close double quote.