Alright. So now let's see some of the decisions that the Fed made during the 2008 recession. Let's check out some monetary policy decisions during the 2008 recession. This recession was very special because a lot of different measures were taken that are generally used as monetary policy. It was basically unprecedented, the amount of monetary policy that was implemented. So during that recession, from 2007 to 2009, it was caused by a burst in the real estate market. The real estate market came tumbling down and a lot of things came tumbling with it.
The first thing that happened and a main cause of it was that these mortgages that were there was a lot of sales going on of houses, mortgages were bundled and sold as securities called mortgage-backed securities. We talked about this in a lot more detail in another video about the recession. More information about the causes. Here, we're going to focus on the monetary policy that happened. These mortgage-backed securities, this is basically where they took a bunch of mortgages from different people, bundled them up together, low-risk people and high-risk people bundled together and sold as securities. So whenever those mortgages made payments, well, that was like a return on the investment in these mortgage-backed securities. They were made to look safe because safer mortgages were bundled with high-risk subprime mortgages. There were mortgages that were given to people who were not as creditworthy and they were bundled together with safer investments to make it look okay. Ethically, that could have been a problem already. As more mortgages defaulted, as this real estate bubble started to crash, more and more people stopped paying their mortgages and these mortgage-backed securities, the mortgage-backed securities, MBS, they suffered losses and a lot of them were owned by investment banks. There were a lot of investment banks that had huge positions in mortgage-backed securities because for a long time they were getting a lot of returns while the market was booming. But when the crash happened, there was a lot of uninsured losses within these investment banks. That was a big tumbling where a lot of these banks started to show huge losses that basically made them insolvent and bankrupt.
So we're going to talk about some things that happened near the beginning of the recession and then a major event that basically turned the recession, that was a turn in the recession and then how basically it ended. Some of the first decisions that the Fed made, some actions they took, where they were allowing discount loans to some investment banks. Discount loans are generally not made to investment banks. They were made to commercial banks on overnight-type stuff, but now they were allowing investment banks to get discount loans, which are very low-interest rate loans so that they could have some liquidity. It's providing some short-term funds to the investment banks without having them need to sell new securities, create new securities and take on more risk. They allowed these discount loans. They also loaned 200,000,000,000 of treasury securities in exchange for mortgage-backed securities. These mortgage-backed securities were crap, right? They had lost all of their cash flows that they were bringing in and they loaned out good treasury securities in exchange for basically worthless collateral. This also gave the banks more liquidity to use as collateral rather than having those worthless mortgage-backed securities.
Another thing they did was this was a huge thing: they assisted JPMorgan Chase, one investment bank, in acquiring Bear Stearns. Bear Stearns was going bankrupt, and they basically believed that if Bear Stearns went bankrupt, there would be a financial panic, and a domino effect from Bear Stearns collapsing, well everything, would start to fall and the recession would get worse and worse. So they thought if they could save Bear Stearns and have JPMorgan Chase buy them out, then they would reduce the effects in the future.
So those were some of the first things that happened. And then in September 2008, well, the Federal Government took control of these public entities, Fannie Mae and Freddie Mac, which were mortgage purchasing companies. They assisted in basically providing credit and they had a big role in the mortgage-backed securities. They hoped that by purchasing these companies that the confidence in MBS would have decreased even further and it would, again, push the market into a deeper recession. These mortgage-backed securities, a lot of investment banks had huge positions in these mortgage-backed securities and once they started to fail, they really had nothing left. All of the value that they had was in these securities and they were now basically worthless. In September 2008, this was a big moment in the recession, the Fed allowed another investment bank. At first, they saved Bear Stearns through that purchase. But now they let another investment bank called Lehman Brothers go bankrupt. They just said, alright, you're going to fail. We're not going to bail you out. The reason they did this was they started to realize that there was what's called moral hazard in this situation. Moral hazard is a problem when it comes to bailing you out in this situation from an uninsured risk. Moral hazard has to do with these banks having taken all these risky investments through these mortgage-backed securities, and they didn't have basically any insurance, to cover them and for the most part, they didn't have the insurance to cover them, but what happened was the government stepped in and even though they lost all this money through all of these risky investments, the government stepped in and said, hey, we're going to bail you out. Rights? So, by arranging the purchase of Bear Stearns, the government effectively provided insurance for the risky decision-making. So the government bailed them out, even though they had never paid premiums for insurance for these risks that they took, well, they still got bailed out, and that's not really fair. Right? It could lead to future risks being taken knowing that the government would bail them out. Right? It gives them this kind of idea in their heads like, hey, we can take all these risks, you know. If Something bad happens, the government will bail us out. There's no big problem here. And that's the moral hazard is that they don't want that kind of mentality going on in the investment community. They want safe, long-term reliable investments going on.
The final thing that happened here was in October 2008, there was what was called the Troubled Asset Relief Program, which is TARP. And this is basically where the federal government provided funds to commercial banks in exchange for partial ownership. And this is an unprecedented event for the government to take ownership in some public entities, or excuse, private entities like these investment banks. Right? So the federal government basically gave money to the investment banks in exchange for ownership positions. And it was an unprecedented action for the federal government to take in that situation. Alright? But through these monetary policy decisions, the Great Recession was actually not as bad as it could have been. Right? Well, we'll never know what could have been. But we do know that the Great Recession, when we compare it to say the Great Depression did not last nearly as long, alright? So let's go ahead and pause here and let's move on to.
