Geithner & Bernanke Amid the Global Financial Crisis
1. Fiscal policy: Given the breadth and depth of this recession, it was clear that the Treasury and the entire Obama administration had to take bold actions. In fact, right at the beginning, they were committed to a fiscal stimulus policy package which would be “substantial” enough to pull the economy out of the recession. The final stimulus package signed into law in 2009, the American Recovery and Reinvestment Act, was totaled $787 billion including about one-third tax cuts and one-third aid for states and the unemployed. Of the rest, labor health and education investment got 8%, and infrastructure investment got about 7%. It also included a large amount of government money to bail out the automobile industry. (Frank, 2009) In addition, the U.S. government initiated the Treasury’s Troubled Asset Relief Program (TARP) which was signed by Congress in 2008. This $700 billion program was first designed to free banks and other financial firms of the most toxic securities on their books by purchasing them in auctions. As the financial crisis deepened quickly, the Treasury changed the plan and used the TARP funds to directly recapitalize banks and financial institutions. For example, the Treasury injected $40 billion into AIG and about $125 billion to 8 large banks such as Citigroup, Wells Fargo, Bank of America and etc. (Frank, 2009) Monetary Policy: There are three basic tools for Fed to use -open market operations, discount rate, and reserve requirements. “On the three traditional tools, the Fed had gone about as far as it could go.” (Frank, 2009) In December 2008, the Fed reduced the target federal funds rate to a range of 0 to 25 basis points, the lowest it could be. In addition, the Fed had employed three other types of tools to improve the functioning of credit markets. First, during the crisis, the Fed