Our own sense, reinforced by many reports from market participants, is that our willingness to extend credit to commercial and investment banks prevented far worse market outcomes when flights to liquidity and safety intensified – say, around the time of the problems of Bear Stearns and in the wake of multiple failures and near-failures of financial firms in the second half of September.
Without in any way wanting to pass judgement on any particular case, root causes seem to include distorted incentives coupled with an erosion of a culture that placed great store on acting in a trustworthy way. Finance depends on trust. In fact, in the end, it can depend on little else. Where trust has been damaged, repair has to be made.