Lowering The Liquidity Of The Federal Reserve

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To combat the liquidity issues in the market, the Federal Reserve stepped in and lowered the discount window interest rate with the intent of putting liquidity back into financial markets. These lowered rates had a positive short term affect with some improvements in market liquidity. However, credit markets were still not providing the level of market liquidity that was required by businesses. The first stage of the Federal Reserve’s response was only a short term fix and did not adequately address the market liquidity needs, so the Federal Reserve continued with additional action to supplement market liquidity through the use of non-monetary tools (Sarker, 2009). The non-monetary, second and third stage tools established by the Federal…show more content…
The bank investment programs helped stabilize the banking system by alleviating some of the liquidity pressure on large financial institutions whose failure would have had devastating impacts on the entire economy. The initial authorized TARP budget of $700 billion was later reduced to $475 billion as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, referred to as the Dodd-Frank Act and authority to make new financial commitments under TARP ended in 2010 (Department of Treasury, n.d.). Of the five program areas, the majority of the TARP money was spent stabilizing banking institutions, with a total of $250 billion. $27 billion was committed to efforts in restarting credit markets, and another $47 billion committed to help families avoid foreclosure. The other two program areas were efforts to provide stability to the U.S. auto industry in the amount of $82 billion, and approximately $70 billion was committed to stabilize American International Group (AIG). In addition, the U.S. Treasury implemented standards of executive compensation for financial institutions that were rescued by the TARP program (Department of Treasury, n.d.). The U.S. Department of Treasury publishes TARP reports with details of where TARP funds have been committed, disbursed and recovered. The largest obligations were made to the banking industry in an amount exceeding $250 billion, over half of the total $455 billion obligated funds. Other
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