Liquidity Provision by the Federal Reserve
Ultimately, market participants themselves must address the fundamental sources of financial strains–through deleveraging, raising new capital, and improving risk management–and this process is likely to take some time. The Federal Reserve’s various liquidity measures should help facilitate that process indirectly by boosting investor confidence and by reducing the risks of severe disruption during the period of adjustment. Once financial conditions become more normal, the extraordinary provision of liquidity by the Federal Reserve will no longer be needed. As Bagehot would surely advise, under normal conditions financial institutions should look to private counterparties and not central banks as a source of ongoing funding.