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5 lessons of the Great Recession

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That doesn't mean the efforts to prevent another calamity are hopeless. Rather, in Paulson's view, it means regulators should strive to "address problems before excesses create major speculative bubbles, and [should] have the tools and political will to act with force to minimize the impact of any crisis."


For all its complexity, the financial crisis was, at root, a run on banks. The core challenge wasn't simply that the housing market had collapsed. It was the way the collapse triggered wider doubts about the safety of many large financial firms – and finally caused important pipelines of credit to freeze altogether.

In this case, the "run on the bank" wasn't by mom and pop depositors. It was a run largely by financial firms on one another as they backed away from short-term loans that had flowed easily before 2007.

The problem was a basic one. In good times, banks thrive by loaning money long term, at a relatively high interest rate, using short-term funds that they borrow at a lower rate. But in hard times, their short-term funds can disappear if investors or depositors have reason to worry about the bank's solvency.

When such doubts start spreading systemwide, the panic is generally stopped by the entry of a "lender of last resort." In other words, by the government or central bank. It's a lesson that led to the Federal Reserve's creation after a banking panic in 1907. And it's a lesson that proved vital to quelling the panic of 2008.

As the mortgage crisis evolved into a financial crisis, the Fed and later the Treasury swung into action. From late in 2007 through early in 2009, the Fed gradually rolled out a succession of programs designed to provide credit where private-sector confidence had evaporated. They had abbreviations only a banker could love: the TAF, the TSLF, the PDCF, the AMLF, the CPFF, the MMIFF, the TALF.

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