The Financial Crisis and Federal Reserve Policy

291 Pages·2014·3.276 MB·English

by  Lloyd B. Thomas

The Financial Crisis and
Federal Reserve Policy

The Financial Crisis and
Federal Reserve Policy
Second Edition
Lloyd B. Thomas
THE FINANCIAL CRISIS AND FEDERAL RESERVE POLICY
Copyright © Lloyd B. Thomas, 2011, 2013.
All rights reserved.
First published in 2011 by
PALGRAVE MACMILLAN®
in the United States—a division of St. Martin’s Press LLC,
175 Fifth Avenue, New York, NY 10010.
Where this book is distributed in the UK, Europe and the rest of the world,
this is by Palgrave Macmillan, a division of Macmillan Publishers Limited,
registered in England, company number 785998, of Houndmills,
Basingstoke, Hampshire RG21 6XS.
Palgrave Macmillan is the global academic imprint of the above companies
and has companies and representatives throughout the world.
Palgrave® and Macmillan® are registered trademarks in the United States,
the United Kingdom, Europe and other countries.
ISBN: 978–1–137–37078–5 (hardcover)
ISBN: 978–1–137–37077–8 (paperback)
The Library of Congress has cataloged the hardcover edition as follows:
Thomas, Lloyd Brewster, 1941–
The Financial Crisis and Federal Reserve Policy / by Lloyd B. Thomas.
p. cm.
Includes bibliographical references and index.
ISBN 978–0–230–10846–2
1. Global Financial Crisis, 2008–2009. 2. Financial crises—United
States. 3. Monetary policy—United States. 4. Board of Governors of the
Federal Reserve System (U.S.) I. Title.
HB37172008.T46 2011
330.9_0511—dc22 2010029624
A catalogue record of the book is available from the British Library.
Design by Newgen Knowledge Works (P) Ltd., Chennai, India.
Second edition: November 2013
10 9 8 7 6 5 4 3 2 1
To Sally, Liz, and Sophie

Contents
List of Illustrations ix
Preface xi
Acknowledgments xvii
List of Abbreviated Terms xix
1 Financial Crises: An Overview 1
2 The Nature of Banking Crises 11
3 The Panic of 1907 and the Savings and Loan Crisis 25
4 Development of the Housing and Credit Bubbles 41
5 Bursting of the Twin Bubbles 59
6 The Great Crisis and Great Recession of 2007–2009 79
7 Aftermath of the Great Recession: The Anemic Recovery 97
8 The European Sovereign Debt Crisis 113
9 The Framework of Federal Reserve Monetary Control 131
10 Federal Reserve Policy in the Great Depression 149
11 The Federal Reserve’s Response to the Great Crisis:
2007–2009 169
12 Unconventional Monetary Policy Initiatives: 2008–2013 191
13 The Federal Reserve’s Exit Strategy and the
Threat of Inflation 207
14 The Need for Regulatory Reform 223
Notes 243
Bibliography 259
Index 263

Illustrations
Figures
2-1 Real U.S. home price index, 1893–2013 20
3-1 Lagged average 30-year mortgage rate vs. 3-month
Treasury bill yield 37
4-1 U.S. household and financial sector debt as
percentage of GDP 44
4-2 Inflation rate of U.S. houses, 1998–2013 46
4-3 Issuance by private firms of mortgage-backed securities 48
4-4 Leverage ratios of U.S. investment banks, 2004–2007 54
4-5 Core inflation rates of consumer and producer prices,
1999–2006 55
4-6 Ratio of U.S. national home price index to owners’
equivalent rent 56
5-1 Percentage decrease in house prices, 2006–2007 peaks to
2009–2012 lows 62
5-2 Yield spread: AA commercial paper vs. treasury bills,
June 2007 to December 2008 71
6-1 Potential and actual real GDP in the United States,
1960–2013 80
6-2 CBO estimates of NAIRU and actual unemployment rates,
1960–2013 82
6-3 Change in U.S. total nonfarm employment, 2007–2013 87
6-4 Stock market wealth and home equity wealth of
U.S. households 89
6-5 U.S. private residential fixed investment, 1989–2013 92
7-1 Expenditures on residential investment and consumer
durables as shares of GDP 100
7-2 Differences in spending on residential investment,
nonresidential investment, and consumer durables 104
7-3 Government expenditures as shares of GDP 106
7-4 University of Michigan index of consumer sentiment 107
7-5 Household debt relative to disposable personal income 109
8-1 Government 10-year bond yields in European nations 119
8-2 Government debt/GDP ratios in the PIIGS nations 120