To be sure, the provision of liquidity alone can by no means solve the problems of credit risk and credit losses, but it can reduce liquidity premiums, help restore the confidence of investors, and thus promote stability. It can also reduce panic-driven credit problems in cases in which such problems result from price declines during liquidity-driven fire sales of assets.
The pricing of the liquidity facilities was an important part of the Federal Reserve’s strategy. Rates could not be too high; to have a positive effect, and to minimize the stigma of borrowing, the facilities had to be attractive relative to rates available (or nominally available) in illiquid, dysfunctional markets.