Ten Years after Bear

CEPR Policy Insight No 94

Stephen G Cecchetti, Kermit Schoenholtz

This Policy Insight examines the role of the Federal Reserve in a prior phase of the 2007-2009 crisis as it evolved into an effective lender of last resort for dollar-based intermediation. Between BNP Paribas' August 2007 suspension of redemptions from three US mutual funds and the run on Bear Stearns, the Fed acted in response to this broad and deepening liquidity crisis. The authors suggest that the Fed's assumption of this role as a backstop for dollar liquidity was one of the keys to preventing the Global Crisis from turning into another Great Depression. The authors conclude by assessing the Federal Reserve's preparedness in the event of a similar crisis in the future. Its role as a lender of last resort emerged as the result of a series of ad hoc decisions. Following the 2010 Dodd-Frank Act, some of its crisis actions are no longer authorized. Going forward, crisis management will require not only an effective lender of last resort, but also a credible resolution mechanism for insolvent intermediaries.