Broadly speaking, the Federal Reserve's response to the crisis and the recession can be divided into two parts. First, our financial system during the past 2-1/2 years experienced periods of intense panic and dysfunction, during which private short-term funding became difficult or impossible to obtain for many borrowers. The pulling back of private liquidity at times threatened the stability of financial institutions and markets and severely disrupted normal channels of credit. In its role as liquidity provider of last resort, the Federal Reserve developed a number of programs to provide well-secured, mostly short-term credit to the financial system. These programs, which imposed no cost on taxpayers, were a critical part of the government's efforts to stabilize the financial system and restart the flow of credit to American families and businesses. Besides ensuring that a range of financial institutions--including depository institutions, primary dealers, and money market mutual funds--had access to adequate liquidity in an extremely stressed environment, the Federal Reserve's lending helped to restore normal functioning and support credit extension in a number of key financial markets, including the interbank lending market, the commercial paper market, and the market for asset-backed securities.As financial conditions have improved, the Federal Reserve has substantially phased out these lending programs. Some facilities were closed over the course of 2009, and most others expired on February 1.1 The Term Auction Facility, under which fixed amounts of discount window credit were auctioned to depository institutions, was discontinued in the past few weeks. As of today, the only facility still in operation that offers credit to multiple institutions, other than the regular discount window, is the Term Asset-Backed Securities Loan Facility (TALF), which has supported the market for asset-backed securities, such as those backed by auto loans, credit card loans, small business loans, and student loans. Reflecting notably better conditions in many markets for asset-backed securities, the TALF is scheduled to close on March 31 for loans backed by all types of collateral except newly issued commercial mortgage-backed securities (CMBS) and on June 30 for loans backed by newly issued CMBS.2
In addition, the Federal Reserve has been normalizing the terms of regular discount window loans. We have reduced the maximum maturity of discount window loans from 90 days to overnight for nearly all loans, restoring the pre-crisis practice. In mid-February the Federal Reserve also increased the spread between the discount rate and the upper limit of our target range for the federal funds rate from 25 basis points to 50 basis points. We have emphasized that both the closure of our emergency lending facilities and the adjustments to the terms of discount window loans are responses to the improving conditions in financial markets. They are not expected to lead to tighter financial conditions for households and businesses and hence do not constitute a tightening of monetary policy, nor should they be interpreted as signaling any change in the outlook for monetary policy.
The Fed's actions during this crisis have been a primary reason the US did not slip into a depression.
Remember how this started:
See video at about 2:10 for about a minute. The country was literally hours away from a complete financial meltdown in the form of an electronic run on the banks.
The only way to deal with that is a massive influx of liquidity (record low rates) and unconventional programs like those the Fed engaged in. It's really that simple.
But also note that most of those programs are done. And for some reason no one is celebrating that -- or even pointing that out.
