Fathimath Musthaq in Phenomenal World:
The 2008 crisis heralded a new age in central banking. The scale and nature of central bankers’ interventions was unprecedented. Traditionally, as lenders of last resort, central banks lend at escalating rates against good collateral to solvent institutions in times of crisis. In 2008 central banks broke every rule in the book: deviating from the principle of full collateralization, they lent to non-bank entities and made outright asset purchases. This exposed their balance sheets to various credit, interest-rate, and market risks. The European Central Bank made asset purchases under an “enhanced credit support” program that dealt in public securities of various credit risks and even provided liquidity in foreign currencies, primarily the US dollar.1 The Bank of England made outright purchases of government bonds while the US Federal Reserve purchased up to 90 percent of all new issues of mortgaged backed securities (MBS) to ensure liquidity in US money markets. The Fed also established swap lines with various central banks, including the Swiss National Bank, the ECB, the BoE, and the Bank of Japan. It went as far as to provide these lines to a select few central banks in the Global South, among them the Central Bank of Brazil and the Bank of Mexico.
Scholars and market watchers have documented and discussed the evolution of crisis-management tools at length. But the most consequential boundary that central banks trespassed was not during the crisis—after all, discretionary measures to prevent a system collapse have been part of central banks’ evolution. The real innovation came in the adoption of crisis tools in noncrisis times, under the banner of so-called unconventional monetary policy.