ECONOMIC POLICY| 445approaches in environmental regulation have attempted to address that con-
cern. Environmentalists have learned that using market principles can work to
their advantage, as the example of grazing rights in the West shows (see "You
Decide)".
Thus while political debates over regulatory policy can still be intense, com-
mon ground may be found in pursuing market solutions to regulatory problems. In
general, the public interest is often served by regulations that protect the environ-
ment, ensure the safety of the food supply, and regulate the dumping of hazardous
chemicals, whether it is through traditional economic regulations or more recent
market approaches. In each instance, politics defi nes how the public interest is
served through regulation.
CASE STUDY: THE 2008–09 ECONOMIC CRISIS
The economic meltdown of 2008–09 is an excellent example of how policy makers
respond to a crisis and how they can infl uence the direction of the economy.
BACKGROUND
Problems in the subprime, or high-risk, mortgage market, the collapse of housing
prices, and the tightening of credit markets had been putting pressure on the econ-
omy through the spring and summer of 2008. The fi rst sign of serious trouble came
in March when the New York Federal Reserve loaned $30 billion to JP Morgan
Chase to facilitate the buyout of Bear Stearns, the investment bank that was going
bankrupt because of its exposure to mortgage-backed securities. Concerns deep-
ened in September, when the federal government took over the Federal National
Mortgage Association and the Federal Home Mortgage Corporation because they
were about to go under. These two government-sponsored enterprises, nicknamed
“Fannie Mae” and “Freddie Mac,” fund most of the home loans in the nation. This
federal acquisition, involving a commitment of $200 billion to back up Fannie
and Freddie’s assets, was “one of the most sweeping government interventions in
private fi nancial markets in decades.”^24 The takeover calmed the credit markets
for a few days, until it became evident that two Wall Street giants, the investment
banks Lehman Brothers and Merrill Lynch, were also going under. Lehman Broth-
ers went bankrupt, Merrill Lynch was bought by Bank of America, and the mar-
kets panicked.
The next day brought more bad news: the world’s largest insurance company,
AIG, was also deep in the subprime mess and teetering on the edge of bankruptcy,
so the Fed stepped in with an $85 billion loan to save it. Despite these dramatic
moves, credit markets seized up, and investors started pulling money out of any-
thing remotely related to the fi nancial crisis. A few days later, Washington Mutual,
the nation’s sixth-largest bank, failed.
CRAFTING A FINANCIAL RESCUE
Throughout the crisis, which was the worst since the Great Depression, Fed Chair
Ben Bernanke, Treasury Secretary Henry Paulson, and congressional leaders
worked together to restore confi dence in fi nancial institutions.^25 After a couple
of false starts, Congress passed a $700 billion Troubled Asset Relief Program