The current credit crisis began in August of 2007, as the markets began to perceive the extent to which residential real property and mortgage-related assets were over-valued during the housing boom of 2002-2006. Acting under existing statutory authority, the Federal Reserve, the Treasury and various other federal agencies began to take ad hoc steps to contain the crisis. These steps included reducing interest rates, expanding Federal Reserve credit facilities, and providing credit support for J. P. Morgan’s acquisition of Bear, Stearns in March 2008. In addition, Congress created a new, stronger regulator for the housing-related government-sponsored enterprises, the FHFA.

In September 2008, a series of events led policy makers to conclude that the previous steps and existing legal authorities were not sufficient to contain the crisis. These events included the conservatorships of Fannie Mae and Freddie Mac, the bankruptcy of Lehman Brothers, the emergency sale of Merrill Lynch to Bank of America, and a run on insurance giant AIG that was halted only by a massive loan from the Federal Reserve. As a result of these events, and the related further disruptions in the credit markets, the Treasury requested that Congress appropriate $700 Billion to “clear the credit markets” of distressed real estate assets.

On October 3, 2008, after a week of political wrangling, President Bush signed the EESA, authorizing the United States Treasury to purchase up to $700 Billion of “troubled assets” from the nation’s financial institutions. Before TARP could be implemented, however, it became apparent that the asset purchase program contemplated by the EESA was not going to resolve the crisis. Market turmoil continued, in part as a result of uncertainty about the workings of TARP. In addition, Great Britain introduced a package of aid that included direct investments in the equity of banks rather than asset purchases. Most observers argued that the British approach was superior.

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