3.2 The crisisThe Great Recession started in December 2007 and even nowadays we can see the consequences of this crisis. Not only within the financial sector, but on the government level as well (like Iceland or Greece). In the current chapter, the housing market burst, the Bear Stones failure and the overall panic in the economy will be discussed.Housing market burst and the Bear Stones failureBy 2007, home foreclosures were rising significantly. Once people could not pay their mortgages any longer, thousands of lenders went bankrupt. The market for CDOs followed the mortgages’ collapse causing huge losses for investment banks. At this moment, the US government did not implement any policy arguing that everything is under control.In March 2008, the investment bank Bear Stones ran out of cash and was acquired by JP Morgan. That was the time government could have noticed the problem, but still did not implement any risk reducing policy.PanicIn September of 2008, three major events led to overall panic.First, the Federal Reserve made a takeover for two mortgage lenders; Freddie Mac and Fannie Mae, even though they were rated AAA days before failing.Second, in the following weeks, the Federal Reserve rescued AIG from bankruptcy because they had too much loses due to unpaid mortgages and as the CDS main provider, couldn’t uphold their duty of insurer.The third event, that led to the panic was the collapse of Lehman Brothers. The only bank that could acquire Lehman Brothers was Barclays, but the UK government did not receive any guarantees from Federal Reserve, hence did not approve the transaction. (Phillip Swagel, 2013) Moreover, the Federal Reserve did not provide any help to Lehman Brother. The failure of Lehman Brothers was a big shock for the market because according to common beliefs, it was “too big too fail”. (Federal Reserve Act, Section 13. Powers of Federal Reserve Banks) The failure of Lehman Brothers let to a collapse of the market with commercial papers issued by banks and to the huge uncertainty in the financial system which influenced the whole world more than all other financial crises before. 3.3 Policies implemented after the crisisThere were several policies implemented during and after crisis and the current chapter will briefly describe the main ones.Troubled Asset Relief ProgramIn October 2008, a $700 billion bail out was passed under the Troubled Asset Relief Program. It was later on reduced to $475 billion. The money spent directed to various program aiming at stabilizing banking institutions, restarting credit markets, stabilizing the U.S. auto industry, saving AIG and helping struggling families avoid foreclosure. (TARP Programs, no date)The Dodd-Frank Wall Street Reform and Consumer Protection Act The Dodd-Frank Wall Street Reform act established several agencies in a response to the financial crisis of 2008 which were intended to decrease various risks in the U.S. financial system.(Dodd-Frank Act, US Commodity Futures Trading Commission)The Financial Stability Oversight Council is charged with identifying and responding to risks to the financial stability of the United States; promoting market discipline. It also monitors the financial stability of firms whose failure could have a major negative impact on the economy. The FSOC has the authority to disband banks that are considered to be big enough to threaten the economic stability and force them to increase their reserve requirements.( John Weinberg, 2013)Similarly, the new Federal Insurance Office is supposed to identify and monitor insurance companies considered “too big to fail”.The Volcker RuleThe Volcker Rule was disallowing banks taking too much risk by restricting types of investment that they can make with their own funds, particularly derivatives, commodity futures and options on these instruments. They were also not allowed to be involved with hedge funds or private equity firms. We can clearly see in the Volcker Rule, a repetition of the Glass-Steagall Act.(Dodd-Frank Wall Street Reform, Investopedia)Moreover, The Volcker Rule brought transparency to derivative markets by requiring institutions like hedge funds or banks, to trade financial instruments on regulated exchanges or swap execution facilities, and not out of public’s sight.Expansionary monetary policyBy using expansionary monetary policy, authorities tried to stimulate aggregate demand and employment. The Federal funds rate was lowered from 4.5 percent, at the end of 2007, to 2 percent at the beginning of September 2008. To improve financial conditions in late 2008, the Federal Reserve made also a series of large-scale asset purchase (LSAP) programs, buying mortgage-backed securities and longer-term Treasury securities. (Bernanke 2012).