The 1451 Review (Volume 1) 2021

Composition of the Federal’s Reserve Assets
Figure 2.
Wheelock, D. (2010). Lessons learned? Comparing the Federal Reserve’s responses to the
crises of 1932-3 and 2007-2009. Federal Reserve Bank of St Louis Review 92, p.98.
As Figure 1 shows, liquidity decreased substantially from mid-2006 to 2007. To
reduce the impact on banks, the Fed coordinated mergers and bailouts, supplied
finance to struggling banks and initiated QE1 in 2009, which largely consisted of
buying GSE-mortgage-backed securities and Treasury Securities (Tooze 2018: 146).
These policies are illustrated in Figure 2, as short-term financing and ‘rescue
operations’ increased the Fed’s balance sheet considerably.
The Fed was also forced to support other nation’s financial sectors. EU banks
particularly needed dollars as the frailty of American Banks led to a surge for funding
which increased costs (Tooze 2018: 146). Yet, many central banks had well below the
dollar reserves needed to support markets William Allen and Richhild Moessner
(2010). In October 2007, the Fed agreed to form reciprocal currency agreements to
support selected central banks (Eichengeen 2014; Wheelock 2010: 94; Tooze 2018). 6
The Term Auction Facility was an important source of funding, as it loaned a
total of 6. 18 trillion dollars in short-term funding at low rates and without
considerable stigma (Tooze 2018: 207). In addition, the Fed supported markets by
setting up the Single Tranche Open Market Operation which loaned 855 billion dollars
in December 2008 ⸻ 70% of which went to foreign banks; and the Primary Dealer
Credit Facility (PDCF) offered overnight finance in return for wide-ranging collateral.
All told, PDCF loaned 8, 951 trillion dollars (Tooze 2018: 208).
The cost of the process was dear — but the cost of inaction would have been
catastrophic. No other nation or institution could mobilise the kind of response the
Fed and U.S Treasury did in the years after the recession (Allen and Moessner 2010).
Without America’s vast resources, the financial system would have been severely
damaged, and the global contraction would have been considerably worse (Bean 2010;
Tooze 2018; Eichengreen 2014). While multilateral cooperation was crucial following
the Financial Crisis, so was American leadership. The two enhanced one-another, but
America’s willingness to lead the global response was ‘indispensable’.
Replacing Politics with Law: How the Current System Limits Economic
Anarchy
The response of policymakers in the aftermath of the 2007/8 Financial Crisis was
considerably better than after the Depression. However, this is a testament to norms
and institutional structure, rather than individual brilliance.
Due to the institutions created since Bretton-Woods, liberal values and marketbased
economics were widely accepted by the time of the Financial Crisis. Leaders such
as Gordon Brown and Barack Obama called upon an extensive institutional framework
to coordinate policy which allowed them to reject economic anarchy. 7 And in turn, they
could cooperate because multilateral organisations created shared norms and eroded
knowledge barriers. This helped to avoid several of the mistakes of the Depression. For
example, the G20 helped to coordinate national economic strategies. 8
This was not as easy in the interwar period, however, since diplomacy was often
conducted in an anarchic and unilateral manner. In contrast to the G20 and the IMF,
the League of Nations lacked the power needed to coordinate a joint response to an
economic crisis (Boughton 2004; Carr 2001).
6
There is quite a lot of debate around the degree of stigma attached to TAF loans. Tooze
(2018) and Eichengreen (2014) assert that there was little, whereas Wheelock (2010) argues
the opposite.
7
Their statements at the time show a clear belief that they could use multilateral
organisations to meet the challenges of the crisis (Pilkington and Tran 2008).
8
I will discuss America’s recent trade disputes later in the article.
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