In the fall of 2008, the world learned what financial stability is, through its absence. Over a few short weeks, Fannie Mae and Freddie Mac entered federal conservatorship, Lehman Brothers filed for bankruptcy, Merrill Lynch was purchased by Bank of America, and AIG received an $85 billion loan from the Federal Reserve to continue operating.
Meanwhile, the Reserve Primary Fund, the country’s oldest prime money-market mutual fund, officially “broke the buck”—meaning its net asset value fell below $1 a share—igniting a run on prime money-market funds that led to the disruption of short-term credit flows and a deepening of the crisis spreading to Main Street. As is often the case after financial crises, we experienced a long and deep recession—and a painfully slow recovery that persists to this day.
