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Chapter 14: Q12. (page 301)

What is TARP and how was it funded? What is meant by the term 鈥渓ender of last resort,鈥� and how does it relate to the financial crisis of 2007鈥�2008?

Short Answer

Expert verified

The TARP or trouble asset relief program is the government-funded treasury bailout. The lender of last resort is the provider of money in case of a crisis or emergency where no other way is available. This lender of last resort is a function of the Federal Reserve, which it successfully performed to bring the economy out of the financial crises of 2007-2008.

Step by step solution

01

Step 1. The treasury bailout

The trouble asset relief program, or TARP, was passed in 2008 by Congress, which allocated $700 billion to the U.S. Treasury to make emergency loans to critical financial firms. The Trap saved many financial institutions from bankruptcy, which would have brought down the entire banking system within and frozen the credit in the economy if they were fallen.

02

Step 2. The lender of last resort

The Federal Reserves become the lender of last resort for the financial institutions and lend them in major financial emergencies. The 2007-2008 financial crisis was one of the biggest financial emergencies wherein the Fed raised around 1903 trillion dollars, successfully disposing of its function.

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Most popular questions from this chapter

Why do economists nearly uniformly support an independent Fed rather than one beholden directly to either the president or Congress?

James borrows $300,000 for a home from Bank A. Bank A resells the right to collect on that loan to Bank B. Bank B securitizes that loan with hundreds of others and sells the resulting security to a state pension plan, which at the same time purchases an insurance policy from a company called AIG that will pay off if James and the other people whose mortgages are in the security can鈥檛 pay off their mortgage loans. Suppose that James and all the other people can鈥檛 pay off their mortgages. Which financial entity is legally obligated to suffer the loss?

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c. the state pension plan

d. AIG

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a. Setting reserve requirements for banks.

b. Advising Congress on fiscal policy.

c. Regulating the supply of money.

d. Serving as a lender of last resort.

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