Abstract
This article is devoted to a central bank’s response to a financial crisis based on a case study of the US Federal Reserve’s handling of the financial crisis in 2008–2010. This article will also be focusing on the intense phase of the financial crisis. It is focusing primarily on the lender of last resort function of a central bank. The article concludes with the most significant issues about the aftermath and the recovery, as well as lessons to deal with financial failure during the coronavirus and its aftermath.
Highlights
A central bank has two main responsibilities: financial stability and economic stability
The main tool that central banks have is the lender of last resort powers by providing short-term liquidity to financial institutions replacing lost funding
The vulnerabilities in the financial system transformed the decline in housing prices and led to a very severe crisis
Summary
A central bank has two main responsibilities: financial stability and economic stability. These special liquidity and credit facilities allowed them to make loans to other kinds of financial institutions, again on the Bagehot’s principle that providing liquidity to firms that are suffering from the loss of funding is the best way to calm the panic.
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