BPEA | Spring 2009

The Financial Crisis: An Inside View

Phillip Swagel
Phill Swagel
Phillip Swagel Director - Congressional Budget Office

Spring 2009

This paper reviews the policy response to the 2007–09 financial
crisis from the perspective of a senior Treasury official at the time. Government
agencies faced severe constraints in addressing the crisis: lack of
legal authority for potentially helpful financial stabilization measures, a Congress
reluctant to grant such authority, and the need to act quickly in the midst
of a market panic. Treasury officials recognized the dangers arising from
mounting foreclosures and worked to facilitate limited mortgage modifications,
but going further was politically unacceptable because public funds
would have gone to some irresponsible borrowers. The suddenness of Bear
Stearns’ collapse in March 2008 made rescue necessary and led to preparation
of emergency options should conditions worsen. The Treasury saw Fannie
Mae and Freddie Mac’s rescue that summer as necessary to calm markets,
despite the moral hazard created. After Lehman Brothers failed in September,
the Treasury genuinely intended to buy illiquid securities from troubled institutions
but turned to capital injections as the crisis deepened.