Federal Policy Responses to the 2007–2009 US Credit Crunch

This paper discusses the key characteristics of the U.S. financial crisis 2007-2009 and focuses on the Federal Policy Response to the lack of liquidity in the financial sector known as the “Credit Crunch”. The surprising depth of the crisis required unprecedented policy measures to be used in order to tackle the mounting liquidity problems in banks and prevent the subsequent credit crunch from taking its toll in the real economy. This required extension of monetary powers of the Federal Reserve and Treasury, which was unmatched in history. The policy response to credit crunch and house price bust was especially important given the fact that recessions following such events tend to be much deeper and longer than any other types of recessions. More importantly, however, the analyses of the current policy responses will determine which form financial markets will take in the next few decades, thus how vulnerable the world economy will be to next disruptions and liquidity problems