Research Primer: New Playbook For a Financial Crisis
NERA Economic Consulting has put together a helpful compilation and analysis of the policy actions by the US government and central banks to address the credit crisis.
The free paper, A New Playbook for a Financial Crisis, provides a timeline of the extraordinary sequence of policy developments from the Federal Reserve, US Treasury, Federal Deposit Insurance Corporation (FDIC), and central banks abroad. It places particular emphasis on the critical role of the Federal Reserve in creating liquidity domestically and internationally. It also discusses prospective policies to provide relief in the housing market, which remains a subject of active debate.
NERA says that despite the extraordinary magnitude of the current crisis, in many respects it looks much like other banking crises. “While the US has not experienced a full-scale systemic bank crisis since the Great Depression, globally we have seen periodic banking crises in both developed and less developed countries. By one count, more than 100 systemic banking crises have occurred since the late 1970s.”
Soberingly, analysis of these crises has found that on average they lead to fiscal costs greater than 10% of GDP. Were the US to follow that pattern, the total would be about $1.5 trillion.
In response to the increasing aid to the financial sector, calls for housing market relief are growing louder, including support from FDIC head Sheila Bair, NERA says. “The presidential election, now two weeks away, may also influence policy decisions. In such extraordinary times, it does not seem implausible that the President-elect and his Treasury Secretary nominee—candidates include current Treasury Secretary Henry Paulson—may be granted a voice in the policy debate even before the inauguration.”
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