Blake Fife October 16, 2011
Econ 102-100 F11 In Fed We Trust Essay
For readers determined to understand the collapse of our nation’s economy, David Wessel’s 2009 novel “in Fed We Trust” infuses economics, politics, history, and finance with elaborate stories of specific people and personalities to best explain our current depression. Understanding what happened in this depression is extremely important not just for bankers and economists, but for everyone affected by it, as knowing what caused the current economic crisis is critical if we are going to prevent the next one.
Wessel believes the crisis officially broke in mid‐August of 2007, when the market suddenly cut off funding to several financial entities and The Federal Reserve responded with reduced discount rates in the hope that banks could provide funds to the firms that were badly affected by the market.
In mid‐September 2007, the Fed began to cut the federal funds rate. The rate had stood at 5.25% from June 2006 through August 2007, but as financial strains grew and the economy worsened, the Fed continued to reduce its fed funds rate, reaching as low as 3% in late January 2008. Then in mid‐March 2008, the market cut off funding to Bear Stearns, a large New York investment bank. To prevent Bear Stearns from bankruptcy, the Federal Reserve provided an emergency loan to Bear Stearns, which then persuaded JP Morgan Chase to buy Bear Stearns and cut the federal funds down to 2%. However, in April, The Fed did not bail out Lehman Brothers, an investment bank twice the size of Bear Stearns. Finally, the Fed bailed out American International Group (AIG), a huge insurance company, the day after Lehman failed and cut its target funds closer and closer to zero by December.
The flight to safety was so intense that in November and De‐ cember 2008 the market bid the yield on Treasury bills...