“I Thought We Were All in This Together”
Actions taken to address the 2008 financial crisis went well beyond devising resolution strategies for individual large financial institutions. Numerous broad-based programs were developed by the Treasury, the Federal Reserve, and the FDIC to provide liquidity support to the financial sector and guarantee bank debt. As the crisis intensified, these programs expanded to cover broader segments of the population.
The net effect of the federal government's flurry of activity was that Washington temporarily guaranteed virtually all of the debt in the financial system. Almost no one with money deposited at, or invested in, a large financial institution was allowed to lose that money. Then the crisis ended.
The first new broad-based guarantee program was for money market mutual funds (MMMFs), which were in a desperate situation subsequent to Lehman's collapse. MMMFs are large pools of money invested on behalf of individuals, businesses, and governments. The funds are part of the shadow banking system, meaning they are outside of the more heavily regulated commercial banking industry. MMMFs have no capital requirements or federal deposit insurance to protect them against losses—the rationale being that their investors are viewed to be more sophisticated market participants such as pension funds, insurance companies, mutual funds, and ...