For immediate release: May 13, 2009
Dallas Fed Annual Report Connects the Dots of the Financial Crisis
DALLAS—A series of complex events led to the nation's current economic crisis, prompting the Federal Reserve to address financial turmoil in both traditional and nontraditional ways, according to the Federal Reserve Bank of Dallas' 2008 Annual Report.
"The Financial Crisis: Connecting the Dots" traces the origins of the crisis and the Fed's response, and addresses the need for long-term financial reform.
The unfolding crisis is presented through excerpts primarily from speeches delivered by Dallas Fed President and CEO Richard W. Fisher throughout 2008.
Fisher traces the crisis to a number of issues, including the housing bubble, market inefficiencies, rapid innovation, monetary policy and global market interconnectedness.
"What began as isolated pockets of trouble in the U.S. housing market soon spread to global markets in mortgage-backed securities, where many of the exotic home mortgage products were gobbled up," Fisher said in an April 2008 speech.
"Soon it became obvious that financial market participants were gagging on the many types of structural credit products—not just those backed by mortgages—they were being served."
The result has been a severe credit crisis in which cash is hoarded, counterparties viewed with suspicion and "no business appears worthy of financing."
Over the course of 2008, the Fed rolled out a number of major initiatives and lending facilities designed to restore capital to the financial system.
"It is the Fed's duty as lender of last resort to lead the way to restoring the efficacy of the financial system," he said.
Fundamental reform of the financial system is needed, according to Fisher. However, he cautions against overregulation that could stifle American innovation and entrepreneurship.
"In building the bridge to restore financial order and efficiency, my primary interest is to do the minimum necessary to get the job done. And no more," Fisher stated in an April speech.
"We must not forget that prudent risk taking is the lifeblood of capitalism, especially the American form of capitalism, where we are constantly replacing the old with the new and the familiar with the new and the innovative," he said.
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