The Financial Crisis of 2007 - 2009

In 2007, a financial crisis began that was the worst since the Great Depression. Among other things, a housing bubble burst, many home loans were in default, and a number of major financial firms either failed or were saved only by government intervention. Well the financial crisis of 2008 and early 2009 was certainly the worst financial crisis since the Great Depression, and by some measures probably even worse than the Great Depression. So the Federal Reserve took a lot of actions to try to stabilize the financial system that involved short-term lending to financial institutions to allow them to remain open and allow them to remain solvent. And beyond that, we took a lot of actions to try to make sure that the critical financial markets were also functioning. The Federal Reserve also dropped interest rates to very low levels to ensure that credit could continue to flow across parts of the country when confidence was really eroded at that time. It's one of the essential roles of a central bank to make sure that liquidity is there in a time of crisis, to make sure that financial institutions were able to get access to funding so that they could continue to make loans and to meet their obligations in the regions. The financial crisis revealed some critical gaps and weaknesses in financial regulation. The Dodd-Frank Wall Street Reform and Consumer Protection Act, which was passed in 2010, dealt with a number of these weaknesses. Dodd-Frank created the Financial Stability Oversight Council, which monitors risk in the overall financial system. The Federal Reserve is a member of this council. The act also expanded the Fed's supervisory responsibilities to include savings and loan holding companies. They also include some non-bank financial firms and payment, clearing, and settlement utilities. And, the act requires the Federal Reserve and other supervisory agencies to supervise financial institutions and critical infrastructures with an eye toward the safety and soundness of each individual firm and risks to overall financial stability. Dodd-Frank transferred many of the Federal Reserve's responsibilities and those of other agencies for consumer protection to the newly formed Consumer Financial Protection Bureau. The Dodd-Frank Act also modified the Fed's ability to give emergency loans to individual companies during financial crises. It requires the Fed to make such loans only when they're made available broadly, not just to specific firms. The Fed and other agencies were there to do what they could to stabilize the economy. But, economies are very complex the crisis was severe and long lasting, and it showed once again that there are no magic bullets to quickly fix an ailing economy.