From Financial Crisis to Recovery (Collection)

12. Timid Policymakers Turn Bold

Policymakers’ early response to the subprime financial shock was sometimes halting and, other times, confused. They misjudged the extent of the shock’s economic and financial damage and were hamstrung by its complexity. They also feared bailing out undeserving homeowners, mortgage lenders, and investors; this would be unfair to people working hard to stay current on their mortgages and would embolden more reckless risk-taking in the future. But instead of dousing the turmoil, the tentative policy response fanned it. Investors didn’t expect to be bailed out, but they were distressed by the government’s reluctance to provide help.

As financial and economic fallout spread, policymakers were forced to take stronger ...