PDF3 - Fire, Flood, and Lifeboats: Policy Responses to the...

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Unformatted text preview: Fire, Flood, and Lifeboats: Policy Responses to the Global Crisis of 2007-09 Takatoshi Ito University of Tokyo Federal Reserve Bank of San Francisco Asia Economic Policy Conference October 18-20, 2009 Embargoed until October 20, 8:00 a.m. Pacific, or upon delivery. 1 CrisisGlobalSB(Ito)v3 Fire, Flood, and Lifeboats: Policy Responses to the Global Crisis of 2007-09 For Federal Reserve Bank of San Francisco Conference, October18-20, 2009 Takatoshi Ito October 12, 2009 1. Introduction The objective of this paper is to examine various policy responses to the global financial crisis of 2007-2009. The global financial crisis of 2008-09 has several stages differentiated in its scope and severity. It started as the bust of subprime mortgages and sharp declines in securitized and re-securitized those mortgages in the United States. Then it spread to other countries, to other securities markets, to financial products at large, to foreign exchange markets, and to the real activities of the global economies. The first clear market warning came in August 2007 when interest rate spreads suddenly rose. With small seemingly sporadic fires flared up and policy measures were applied from August 2007 to September 2008. Before the failure of Lehman Brothers on September 15, 2008, the problems among financial institutions, especially investment banks, were obvious and fire flared up occasionally (August and November 2007; and March 2008), but policy responses to put out fire were effective. Policy responses during this period were, mainly conventional, but some modest unconventional, including arrangement of a rescue merger of Bear Stearns. Problems appeared to be limited to US and European investment banks that touched toxic assets. On September 15, 2008, Lehman Brothers filed for Chapter 11, and that changed the financial markets completely. After the Lehman Brothers failed, spreads skyrocketed and prices of many securities plummeted. Several key markets, such as commercial papers, virtually disappeared. Several large financial institutions in the United States and Europe became undercapitalized if not insolvent. This was big explosion and fire in the United States and the fire spread to other countries and real side of the economy. Some European banks were nationalized and resolved, and US Treasury injected capital into several banks. Central banks acted as the lender of last resort and flooded the 2 markets with liquidity. Many kinds of unconventional monetary policy were applied in the United States and other countries. The interest rate spreads declined markedly after May 2009 and came down to the level of July 2007 by September 2009. The paper will describe how events have unfolded in the United States and how conventional and unconventional policies have been applied, and then discuss effectiveness of those policies....
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This note was uploaded on 12/26/2011 for the course ECON 280B taught by Professor Bohn during the Fall '09 term at UCSB.

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PDF3 - Fire, Flood, and Lifeboats: Policy Responses to the...

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