Essay: Actions Taken by Federal Reserve to Solve the Financial Crisis

Sample Essay

The Federal Reserve took many initiatives during September 2008 and March 2009 in order to solve the financial crisis. The first step taken was to enhance the liquidity facilities provided to banks and financial institutions. The step was taken in broadening of collateral for Primary Dealer Credit Facility – PDCF and Term Securities Lending Facility – TSLF. The auctions of TSLF were set to be conducted each week instead of every two weeks and the amounts in these auctions were increased from $125 billion to a total of $150 billion.

The Federal Reserve authorized the Federal Reserve Bank of New York to lend $85 billion to American International Group – AIG for a 24 month term. The Federal Open Market Committee of The Federal Reserve also authorized an expansion of the temporary reciprocal currency arrangements – swap line by $180 billion in collaboration with ECB and Swiss National Bank. The board approved rules to offer liquidity to markets by providing loans to the banking sector to help finance purchase of Asset Backed Commercial Paper – ABCP. The board broadened liquidity support further through Term Auction Facility by offering $150 billion on 28 days credit. The Money Market Investor Funding Facility was changed by adding new money market investors other than money market mutual funds to facilitate liquidity structure of money markets. In January 2009 the bank published a policy that would help avoid needless foreclosures on mortgage assets held by banks.

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