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All Fall Down

Debt, Deregulation and Financial Crises

Jane D’Arista

All Fall Down traces the ways in which changes in financial structure and regulation eroded monetary control and led to historically high levels of debt relative to GDP in both developed and emerging economies. Rising stocks of debt drove the global financial system into crisis in 2008 when households, businesses, financial institutions and the public sector in some countries strained to generate sufficient income for debt service. The stagnation and fall in asset prices that followed began the process of unwinding that led to a run on the financial sector by the financial sector.
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Chapter 24: How crisis reshaped the monetary toolkit

Jane D’Arista


The Fed responded to the 2008 financial collapse by adopting new strategies and extending the range of assets it acquired. Under various programs, loans to financial institutions amounted to $1.7 trillion of which 62 percent was borrowed by 20 large banks at a mean interest rate of 0.48 percent. The Fed also began a round of asset purchases in November 2008 known as quantitative easing. By May 2013, the central bank had added $3.5 trillion to its balance sheet but it was not getting the jobs and recovery it wanted. Its decision to pay interest on reserves may have helped preserve bank capital but undermined incentives to lend. The anemic outcome of its strategies suggests that the Fed needs to reassess its countercyclical policy tools in the context of a radically changed financial system in which traditional relationship banking has been replaced by a collateralized market system.

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