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5 lessons of the Great Recession

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If the alphabet soup sounds a bit like the New Deal, that's not by accident. The Fed's vice chairman at the time, Donald Kohn, recalls that Bernanke liked to say that although he didn't agree with everything Franklin Roosevelt did to overcome the Great Depression, he did admire the way the president kept trying new ways to strengthen the economy.

When the investment bank Lehman Brothers went bankrupt, financial markets reached their point of maximum uncertainty. Was the crisis spinning out of control? The fear spread into money-market funds, where some 30 million Americans held cash. "When that market dried up and came under pressure," recalls Paulson, "my phone was ringing off the hook."

Corporations relied on money-market investors for short-term borrowing needs, from making payroll to dispensing dividends. Paulson, acting as President George W. Bush's wartime general of finance, tapped a rarely used emergency power to backstop money-market funds, a key step toward containing the post-Lehman panic.

Another giant step – and a highly controversial one – was to win congressional backing for a $700 billion Troubled Asset Relief Program (TARP) at the Treasury's disposal. This was the legislation that was the subject of the Sept. 18 meeting in Ms. Pelosi's office.

By the time the TARP legislation passed, Paulson and other frontline crisis managers were looking to do something quicker and more powerful than buying troubled bank assets. They decided to use TARP to inject capital directly into financial firms – investing taxpayer dollars to give them an added cushion against loan losses.

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