What Have We Learned? (I)
As we discuss more fully in Chapter 20 , the latest recession confirms the pivotal role that the Federal Reserve can play when there is a financial panic. By acting as a lender of last resort, the Fed has the capacity to stave off economy-wide financial meltdowns. This was the role originally intended for the Fed back in 1913, and one that it failed to perform in 1929–1933.
It is now clear that the Fed has the tools to do this should the need arise in the future. A second key lesson of the recession of 2007–2009 is one that politicians don’t seem to have absorbed. The attempts of Congress to artificially pump up home ownership in the United States chiefly encouraged financially ill-equipped individuals to purchase houses that they could not afford.
When the housing market turned down, many of these people walked away from their obligations, with devastating consequences for the rest of the economy. Thus, Congressionally mandated housing policy set the stage for an unduly severe recession. There is no sign as yet, however, that the members of Congress recognize their role in this.
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