place directed by different agencies and in conjunction with the treasury. at the same time, fiscal policy was engaging with congress approving the $ 750 billion troubled asset relief program ( tarp ) program. policy had entered the “ whatever it takes ” phase in an effort to keep the great recession from becoming something much worse. 15 by the spring of 2009, the various guarantees and backstop liquidity facilities covering different sectors of the shadow banking system were in place. the last element required to deal with the panic of 2007 was to address the uncertainty over the viability of the large systemically important financial institutions. a horizontal review of the 19 largest financial firms was conducted to assess their capital needs under a “ worse - than - anticipated economic scenario ” – this was called the supervisory capital assessment program or scap ( you can tell that we are fond of acronyms ). there were two design features of the scap program that were essential for its ability to reduce the uncertainty in financial markets. first, the process was designed to be transparent with both the methodology published up front and the firm - by - firm results published at the conclusion. second, if a firm was deemed to need capital but was unable to raise it in the see brian sack. 2010. “ reflections on the talf and the federal reserve ’ s role as liquidity provider ”. remarks at the new york association for business economists, june 6. david wessel. 2009. in fed we trust. new york : crown business. market, treasury pledged to provide the capital. the scap program was successful in restoring a degree of confidence in financial markets and in enabling these financial firms to raise capital on their own. by the second half of 2009, the financial fever from the panic of 2007 had finally broken with the 3 - month libor / ois spread narrowing back to pre - crisis levels. 16 the economy began to grow again. having served their purpose, the fed ’ s special liquidity facilities have been wound down. the policy focus has shifted to regulatory reforms and how to prevent a future financial crisis. to be successful, these reforms must deal with the run dynamics in the shadow banking system, as well as devise ways to limit the leverage cycle that is an integral part of asset booms and busts that can trigger a panic. if the lessons from the panics of 1907 and 2007 are incorporated into the reforms, we may well avoid the panic of 2107. recently the spread has widened with the onset of concerns over

joseph s tracy : what the fed did and why remarks by mr joseph s tracy, executive vice president of the federal reserve bank of new york, at the westchester county bankers association, tarrytown, new york, 25 june 2010. * * * in my remarks this morning, i would like to look back over the events of the past several years and offer my perspective on what were the essential drivers of the financial crisis and the federal reserve ’ s interventions. 1 i will review the changes that have been taking place in the u. s. financial system and how these changes created the conditions conducive to the crisis. i will then discuss the developments in residential real estate financing that provided the catalyst for the crisis. with this background, i will outline the interventions that were carried out to mitigate the crisis, focusing on those conducted by the federal reserve. i will direct my remarks to the facilities that were created rather than to the actions taken for individual institutions since these have been discussed extensively elsewhere. the lessons learned from the crisis are important for the design of the policy response aimed at reducing the likelihood that the u. s. economy ever again experiences this degree of trauma. i begin with the simple exercise of what name we should assign to this past crisis. at first blush, this may not seem like a useful exercise. but, as shakespeare reminded us, names are important as they convey a sense of our understanding of the event. one name that has gained popularity is the “ great recession ”, which is dated as beginning with the bankruptcy of lehman brothers on september 15, 2008. this name conveys both the severity of what occurred, as well as the calamity of what was avoided. the contraction in real output in the six months following the demise of lehman brothers exceeded in size any other post world war ii recession – in that sense, it was a great recession. however, aggressive monetary and fiscal policy actions both domestically and abroad were successful in preventing a complete meltdown of the u. s. and the world economy. in that sense, the name also emphasizes what the crisis was not. however, the name tends to focus one ’ s attention too much on the effect and not the cause of the crisis. an alternative name is the “ panic of 2007 ”, which is dated as beginning with the announcement by bnp paribus on august 9, 2007, of its suspension of redemptions for three of its investment funds. this name stresses the financial crisis as the preci