See Tobias Adrian, Christopher Burke and James McAndrews. 2009. “The Federal Reserve’s Primary Dealer Credit Facility”. Current Issues in Economics and Finance 15, no. 4 (August). 12  Gary Gorton. 2010. “Questions and Answers about the Financial Crisis”. National Bureau of Economic Research, Working Paper No. 15787, February. 13  Gorton, ibid. 6  BIS Review 92/2010  subprime “E. coli scare” had effectively been transmitted far and wide across financial markets. Let me turn now to the interventions used to combat the financial crisis. The Fed knew much less back in the autumn of 2007 than we know now about how far and wide the financial crisis was to spread and the implications this would have for the real economy. The initial response by the Fed was to use its traditional liquidity tools. On August 10, 2007, the Federal Open Market Committee (FOMC) issued a statement indicating that the discount window was available as a source of liquidity to those firms that had access to the window. A week later, the FOMC cut the discount rate (the interest rate charged on discount window loans) by 50 basis points (a half of a percentage point) and extended the available term for these loans from overnight to 30 days. Given that the liquidity strains were affecting many firms that did not have direct access to the discount window, a key for this intervention to be helpful was that depository institutions would pass the liquidity on to those firms that needed it the most.
14 In December, the FOMC announced that it would begin to significantly expand its balance sheet through purchases of long-term assets including agency debt, agency mortgage-backed securities and long-term treasuries – the Large Scale Asset Purchase or LSAP program. Other interventions were taking place directed by different agencies and in conjunction with the Treasury. At the same time, fiscal policy was engaging with Congress approving the $ billion Troubled Asset Relief Program (TARP) program. Policy had entered the “whatever it takes” phase in an effort to keep the Great Recession from becoming something much worse. 15 By the spring of 2009, the various guarantees and backstop liquidity facilities covering different sectors of the shadow banking system were in place. The last element required to deal with the Panic of 2007 was to address the uncertainty over the viability of the large systemically important financial institutions. A horizontal review of the 19 largest financial firms was conducted to assess their capital needs under a “worse-than-anticipated economic scenario” – this was called the Supervisory Capital Assessment Program or SCAP (you can tell that we are fond of acronyms). There were two design features of the SCAP program that were essential for its ability to reduce the uncertainty in financial markets. First, the process was designed to be transparent with both the methodology published up front and the firm-by-firm results published at the conclusion. Second, if a firm was deemed to need capital but was unable to raise it in the  14  See Brian Sack. 2010.