ABSTRACT
This chapter reviews domestic policy response to the financial crisis of 2007. It examines the strengths and weaknesses of Keynesian economics in the context of the alliances and interests that influenced the scope, character and outcome of the post-crisis regulatory reform. While different government agencies tried to address the crisis, the Federal Reserve and the Treasury engaged in a series of bailouts for insolvent corporations that were deemed “too risky” to fail. Since the Federal Reserve did not initially prevent the housing bubble from bursting, mainly concentrating on inflation rather than asset bubbles (based on Alan Greenspan’s ideology), it had to intervene on a much larger scale later on. This included the bailout of Bear Stearns in March 2008, the take over of Fannie Mae and Freddie Mac, and the insurance company AIG in September 2008. The investment bank Lehman Brothers was allowed to fail on the grounds that it was essentially bankrupt, thus not having the same consequences as AIGs.
