Question

What is TARP and how was it funded? What is meant by the term “lender of last resort,” and how does it relate to the financial crisis of 2007–2008?

Short answer

The TARP or trouble asset relief program is the government-funded treasury bailout. The lender of last resort is the provider of money in case of a crisis or emergency where no other way is available. This lender of last resort is a function of the Federal Reserve, which it successfully performed to bring the economy out of the financial crises of 2007-2008.

Step-by-step solution

Step 1. The treasury bailout

The trouble asset relief program, or TARP, was passed in 2008 by Congress, which allocated $700 billion to the U.S. Treasury to make emergency loans to critical financial firms. The Trap saved many financial institutions from bankruptcy, which would have brought down the entire banking system within and frozen the credit in the economy if they were fallen.

Step 2. The lender of last resort

The Federal Reserves become the lender of last resort for the financial institutions and lend them in major financial emergencies. The 2007-2008 financial crisis was one of the biggest financial emergencies wherein the Fed raised around 1903 trillion dollars, successfully disposing of its function.