Federal Reserve responses to the subprime crisis

This lavishing of cash and gentle treatment was the opposite of the harsh terms the U.S. had demanded when the financial sectors of emerging market economies encountered crises in the 1990s.

[3] In August 2007, Committee announced that "downside risks to growth have increased appreciably," a signal that interest rate cuts might be forthcoming.

The Fed can electronically create money and use it to lend against the collateral of various types, such as agency mortgage-backed securities or asset-backed commercial paper.

When the economy begins to recover, that will be the time that we need to unwind those programs, raise interest rates, reduce the money supply, and make sure that we have a recovery that does not involve inflation.

"[7] Both the actual and authorized size of the Fed balance sheet (i.e., the amount it is allowed to borrow from the Treasury to lend) was increased significantly during the crisis.

Also, for higher-priced loans, lenders now will be required to establish escrow accounts so that property taxes and insurance costs will be included in consumers' regular monthly payments...Other measures address the coercion of appraisers, servicer practices, and other issues.

In addition, term repurchase agreements expected to cumulate to $100 billion were announced, which enhance the ability of financial institutions to sell mortgage-backed and other debt.

The action made the Fed a crucial source of credit for non-financial businesses in addition to commercial banks and investment firms.

This program supported the issuance of asset-backed securities (ABS) collateralized by loans related to autos, credit cards, education, and small businesses.

[16] In March 2009, the Fed announced that it was expanding the scope of the TALF program to allow loans against additional types of collateral.

[17] In March 2008, the Fed provided funds and guarantees to enable bank J.P. Morgan Chase to purchase Bear Stearns, a large financial institution with substantial mortgage-backed securities (MBS) investments that had recently plunged in value.

This action was taken in part to avoid a potential fire sale of nearly U.S. $210 billion of Bear Stearns' MBS and other assets, which could have caused further devaluation in similar securities across the banking system.

[18][19] In addition, Bear had taken on a significant role in the financial system via credit derivatives, essentially insuring against (or speculating regarding) mortgage and other debt defaults.