Introduction to Finance

4.1
U.S. Central Bank Response to the 
Financial Crisis and Great Recession
CRISIS
As previously noted, the 2007–2008 fi nancial crisis and the 2008–2009 Great Reces-
sion combined to create a “perfect fi nancial storm.” Many government offi
cials, politicians, 
fi nancial institution executives, and business professionals felt during the midst of the 
fi nancial storm that both the U.S. and world fi nancial systems were on the verge of collapse 
in 2008. The 
Federal Reserve System (Fed)
, the central bank of the United States, is 
responsible for setting monetary policy and regulating the banking system. Direct actions 
and involvement by the Fed were critical in government and related institutional eff orts to 
avoid fi nancial collapse.
The federal government has historically played an active role in encouraging home own-
ership by supporting liquid markets for home mortgages. If banks and other lenders originate 
home mortgages and then “hold” the mortgages, new mortgage funds are not readily available. 
However, when banks and other lenders are able to sell their mortgages in a secondary mortgage 
market to other investors, the proceeds from the sales can be used to make new mortgage loans. In 
Federal Reserve System (Fed) 
U.S. central bank that sets monetary 
policy and regulates banking 
system
1
Stephen H. Axilrod, Inside the Fed, (Cambridge: The MIT Press, 2009), p. 159.

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C H A PT E R 4 Federal Reserve System
1938, the president and Congress created the 
Federal National Mortgage Association (Fannie 
Mae)
to support the fi nancial markets by purchasing home mortgages from banks and, thus, 
freeing-up funds that could be lent to other borrowers. Fannie Mae was converted to a government-
sponsored enterprise (GSE), or “privatized,” in 1968 by making it a public, investor-owned com-
pany. The