Question

What might the impact have been of a failure to provide liquidity in 1907 panic and again in 2008 crisis

in other words what would be the consequenses and the results if the liquidity problem was not addressed and solved (if the federal reserve did not take the immediate actions to solve the problem)

a) The panic of 1907

b) in the 2008 crisis

Answer 1

Lack of Liquidity in the banking system may lead withering of public trust in banking and financial system. The panic of 2007 and crisis of 2008 have similarities when it comes to the problem of liquidity.

In 1907, due to failure of few banks, there was huge bank run and Federal Reserve could not raise the level of liquidity. Faith of public in financial system dipped.

Likewise, 2008 crisis was exacerbated and prolonged by the lack of liquidity. Many financial institutions failed due to lack of liquidity. Later on, Government and Fed attempted to provide bailout packages to those financial institutions those who were facing the issue of liquidity.

Hence, Lack of liquidity in financial system can lead to the collapse of financial system. Problem of liquidity may have dire consequences in developing countries due to underdeveloped financial system; since people lose their faith in banking system instantaneously in developing countries

Crisis of 2008 was much severe as complexities of financial system have grown multiple times.