The financial crisis that started in the summer of 2007 and increased in September 2008

has remade Wall Street. A well-known financial institution such as Bear Stearns, Lehman
Brothers, Merrill Lynch, AIG, Fannie Mae, Freddie Mac, and Citigroup have either disappeared
or been rescued through large government bailouts. The main measure of “home-grown”
financial sector imbalances ahead of the crisis is the rapid expansion of credit sourced in
wholesale funding markets over the period 1999 to 2007. The increase in wholesale funding may
have been encouraged by abundant liquidity ahead of the crisis, but became the Achilles heel of
the global financial system when funding markets dried up from the summer of 2007 and
increasingly from the autumn of 2008. Goldman Sachs and Morgan Stanley converted to bank
holding companies in late September, marking the end of an era for investment banking in the
United States. While the U.S. economy initially appeared surprisingly resilient to the financial
crisis that is clearly no longer the case. The crisis that started on Wall Street migrated to Main
Street. Taylor (2007) argued that in the United States, the need for housing is sensitive to money
market interest rates and that accommodative policies on the role of the Federal Reserve from
2001 was likely thus to have led to the build-up in housing demand and asset costs.
Besides that, we need to identify the possible causes of financial crisis, the impact of
financial crisis on the economy and the lesson learnt from the crisis. There are crises among
financial institutions tied to a decline in the value of their assets and the effect this has on their
solvency in the presence of leverage. But the crisis has also struck household balance sheets
through a decline in their assets, notably housing and the stock market. As a result, households
have cut back their consumption, reducing the economy’s demand for goods and services.
Finally, the main conclusions on the relative importance of global imbalances and monetary
policy carry through when we replace our main measure of financial imbalances. For smaller
advanced countries, inflows are stronger where policy rates had been high relative to global
rates. The balance sheets of both the U.S. government and the Federal Reserve play starring roles
in current events. In this sense, the current crisis is tightly linked to balance sheets throughout the
economy for financial institutions, for households, for governments, and for the Federal Reserve.