What Was A Major Cause Of The Fiscal Crisis Of 2009 How Did The Federal Reserve And Federal – Research Paper Example
What was a major cause of the fiscal crisis of 2009? How did the Federal Reserve and federal government respond to the downfall of Bear Stearns and Lehman Brothers?
The causes of fiscal crisis of 2009 can be attributed to a number of things. The major cause is the credit lines. No new credit lines were created which caused the flow of money to slow down causing slow economic growth and trade in assets. As a result, the financial institutions that were holding mortgage backed securities did not receive the payment of loans and quenched their reserve cash as well as limited their abilities to provide more credit. Many owners could not afford mortgage anymore that caused decline in the housing prices well below the mortgage value. As a result, financial institutions holding mortgage backed securities declared bankruptcy and were either bought out or merged with other institutions such as Merrill Lynch, Fannie Mae, and Freddie Mac and so on. The US government and Federal Reserve stepped in to restore the liquidity back to the financial markets.
Lehman Brothers filed for the largest bankruptcy protection from Federal Reserve which was denied and no other Wall Street company came to its rescue. Allowing the failure of Lehman caused a chain reaction when a money market fund claimed that it had lots of worthless Lehman debt. The Fed did not bailout Lehman Brothers because the company did not have any collateral to secure a Fed loan and said that it was up to Wall Street to solve the problem. The real question that arose was whether it was legal for Fed to bailout an investment bank or not. That is why when Fed bailed out Bear Stearns it did not do so directly.
Bear Stearns is the oldest and largest Wall Street banks. Clients were withdrawing from the bank causing loss of confidence in the investment bank. Since it is an investment bank, it couldn’t directly go to the Fed, instead it funds from central bank’s discount window will be provided to Bear Stearns through JPMorgan. The bailout is for about $29 million.