Donald L. Kohn: “The Federal Reserve’s Policy Actions during the Financial Crisis”

The financial and economic crisis that started in 2007 tested central banks as they had not been tested for many decades. We needed to take swift and decisive action to limit the damage to the economy from the spreading distress in financial markets. Because the financial distress was so deep and pervasive and because it took place in financial markets whose structure had evolved dramatically, our actions also needed to be innovative if they were to have a chance of being effective. Many central banks made substantial changes to traditional policy tools as the crisis unfolded. But the epicenter of the financial shock was in U.S. mortgage markets, with severe effects on many of our financial institutions, and our financial markets had perhaps evolved more than many others. As a consequence, no central bank innovated more dramatically than the Federal Reserve.