William C. Dudley, President and Chief Executive Officer of the New York Federal Reserve spoke recently on "The Federal Reserve's Liquidity Facilities" at the Vanderbilt University Conference on Financial Markets and Financial Policy. He said, "First, we addressed the acute seizing up of inter-bank financing markets. For banks, we introduced the Term Auction Facility in December 2007 and for the primary dealers, the Term Securities Lending Facility and Primary Dealer Credit Facility in March 2008.... Second, we expanded our provision of short term financing beyond banks and dealers in order to alleviate constraints on highly rated corporate borrowers. The two most noteworthy examples of this are the Commercial Paper Funding Facility, which was introduced in October 2008, and the Term Asset-Backed Securities Lending Facility.... Third, once policy rates were near the zero-bound, we expanded the type of assets that the Fed purchased. In order to put downward pressure on general longer term borrowing rates, particularly mortgage rates, the Federal Reserve has purchased the debt of the GSEs, namely, Fannie Mae and Freddie Mac and the mortgage-backed-securities they issue, and, more recently, longer-term Treasuries." Dudley asks, "So why has the Fed done so much in terms of special programs?" He says, "As I see it, there are four major reasons behind the dramatic expansion of the Fed's liquidity programs: To provide liquidity to banks and dealers in order to slow down the deleveraging process. To expand the balance sheet capacity of the private sector to counteract the shrinkage underway in the non-bank financial sector. To restore and improve market function. To ease financial market conditions."
