The Fed’s rescue of Bear Stearns and the Treasury Department’s nationalization of Fannie Mae and Freddie Mac in 2008 provoked widespread criticism. Consequently, the Fed and Treasury were very reluctant to approve further bailouts, and they allowed Lehman Brothers to fail in September 2008. Lehman’s collapse triggered a global panic and a meltdown of financial markets around the world. The Fed and Treasury quickly arranged a bailout of AIG, and Congress approved a $700 billion financial rescue bill. Treasury established the Troubled Asset Relief Program, which injected capital into large universal banks, while the Fed provided trillions of dollars of emergency loans and the FDIC established new guarantee programs for bank debts and deposits. In February 2009, federal regulators pledged to provide any further capital that the nineteen largest U.S. banks needed to survive, thereby cementing the “too big to fail” status of U.S. megabanks. The U.K. and other European nations arranged similar bailouts for their universal banks. Meanwhile, thousands of small banks and small businesses failed, millions of people lost their jobs, and millions of families lost their homes during the Great Recession.
The housing market-bank credit relationship: Some thoughts on its causality