Prior to the collapse of Bear Stearns, the Federal Reserve's response to the turmoil in the money markets had been largely limited to reductions in the Fed Funds rate in support of the private mechanisms of renance discussed above.

Now the Fed exhibited classic lender-of-last-resort intervention, in which it Sold its holding of Treasury bills and lent the proceeds to the private financial system. Although the size of the Fed's balance sheet did not change in this period, its composition changed significantly with the creation of a number of liquidity programs.

fed The TSLF was introduced on March 11, 2008, three days before Bear's collapse. It allowed primary dealers to bid a fee in order to borrow Treasuries from the Fed for a period of up to 28 days against less liquid securities, in particular agency debt, agency residential MBS and investment-grade private-label residential MBS. In this way, dealers could now swap non-Treasury collateral for Treasuries with the Fed. TSLF allowed banks with MBS to obtain Treasuries, which could then be put out on repo out in order to continue to nance their positions.

The Term Auction Facility (TAF) was a second program aimed at alleviating stress in the money markets. Like TSLF, TAF accepted illiquid securities as collateral. Unlike TSLF, it provided additional reserves directly to banks. Thus TAF essentially provided anonymous discount-window lending.

The Primary Dealer Credit Facility (PDCF) sought to replace seized-up repo markets by providing overnight loans (of money) to dealers against questionable collateral.

To understand what was done, look rst at Figure 2. 3 (p. 118) To understand what was done, look rst at Figure 2.3 (p. 118). Policy steps through September 2008 altered the composition, but not the overall size, of the Fed's balance sheet. The Fed's stock of Treasury securities was sold (or swapped, in the case of TSLF) to fund the various liquidity facilities. No change was needed on the liability sidereserve balances. Interventions in the third stage were dierentthe Fed expanded its own balance sheet dramatically in a short period of time. On the liability side, it is clear that the expansion was funded, in the end, with increased reserve balances. The asset side is more complicated, and is our focus in this section.