The Fed then began directly assisting the markets for commercial paper and asset-backed securities. 4173 ) adds conditions to the Fed's emergency lending authority. 111-203 . Most emergency facilities were allowed to expire in February 2010, but the central bank liquidity swap lines were reopened in May 2010 to provide dollar liquidity to foreign countries needed as a result of the economic crisis in Greece. 4173 also made comprehensive changes to the financial regulatory system. CRS Report R40877, Financial Regulatory Reform: Systemic Risk and the Federal Reserve , analyzes the effects of this legislation on the Fed's role in the regulatory system. This report reviews the Fed's actions since August 2007 and analyzes the policy issues raised by those actions. Second, the Fed has reduced the federal funds target on numerous occasions over the course of the crisis. In December 2008, the Fed began providing so much liquidity that the interest rate target often fell close to zero. Many of the new facilities are aimed at other parts of the financial system, however, and the Federal Reserve Act is largely silent on the Fed's authority outside the banking system. At times before the federal funds target was reduced to zero in December 2008, the Fed faced conflicting goals—it sought to ensure that banks have enough reserves to remain liquid, but it also sought to maintain its target for the federal funds rate to meet its economic goals. P.L. Bear Stearns could not access the discount window directly because, at that point, only member banks could borrow directly from the Fed. Who Benefits From Assistance to AIG? Indeed, if the loans are repaid, they would increase the profits of the Fed, which in turn would increase the Fed's remittances to the Treasury. By the end of 2008, its loans and private assets holdings were much larger than its Treasury holdings (see Table 4 ). Thus, any potential losses on loans to the Fed would not involve taxpayer dollars flowing to the Fed unless the losses exceeded the sum of its other earnings and its capital and the Treasury decided it did not want the Fed to operate as technically insolvent. With an eye to the potential long-run inflationary effects of the growth in the Fed's balance sheet, the Fed and Treasury announced in March 2009 that they would seek "legislative action to provide additional tools the Federal Reserve can use to sterilize the effects of its lending or securities purchases on the supply of bank reserves." To date, legislation to allow the Fed to do so has not been considered. Limits on the Fed's Ability to Address Problems in the Financial Sector

The Fed's actions since 2007 have been primarily focused on restoring liquidity to the financial system—lending to financial firms to convert their illiquid assets into cash or U.S. Treasury securities. As discussed above, it has extended liquidity to non-bank financial firms since 2008 through new lending facilities. H.R. Institutions that are too big to fail are ones that are deemed to be big enough that their failure could create systemic risk , the risk that the financial system as a whole would cease to function smoothly. Although that theory can be debated, it is clearer that the precedent of the Fed's role in the Bear Stearns acquisition may strengthen the perception of other institutions and investors that any financial firm, regardless of whether it is a depository institution, will be bailed out in the future if it is too big to fail, or merely too interconnected to fail. Oversight, Transparency, and Disclosure of Emergency Programs

Because profits and losses borne by the Fed ultimately get passed on to taxpayers (see " Cost to the Treasury "), some Members of Congress have argued that more information about the Fed's emergency activities should be made available to the public. While GAO has had longstanding authority to audit the Fed's non-monetary policy functions, the Federal Banking Agency Audit Act of 1978 (31 USC 714(b)) restricts GAO from auditing certain Fed activities: (1) transactions with foreign central banks or governments; (2) "deliberations, decisions, or actions on monetary matters, including discount window operations, reserves of member banks, securities credit, interest on deposits, and open market operations;" and (3) "transactions made under the direction of the Federal Open Market Committee." Since then, inflation has been stable. The authority allows lending to non-member banks, but some of the loans in the Bear Stearns and AIG agreements were to LLCs that the Fed created and controls, and have been used to purchase Bear Stearns' and AIG's assets. 4173 removes most GAO audit restrictions and requires disclosure of the identities of borrowers with a delay. The increase in the balance sheet could have already been automatically reversed by the decline in the Fed's direct lending, but the Fed has chosen to offset it through large-scale purchases of assets to maintain a high level of liquidity in the economy.
The Federal Reserve (Fed) has been central in the policy response to the financial turmoil that began in August 2007. It has sharply increased reserves to the banking system through open market operations and lowered the federal funds rate and discount rate on several occasions. Since December 2008, it has allowed the federal funds rate to fall close to zero. As the crisis deepened, the Fed's focus shifted to providing liquidity directly to the financial system through new policy tools. Through new credit facilities, the Fed first expanded the scale of its lending to the banking system and then extended direct lending to non-bank financial firms. The latter marked the first time since the Great Depression that firms that are not banks or members of the Federal Reserve System have been allowed to borrow directly from the Fed. After the crisis worsened in September 2008, the Fed began providing credit directly to markets for commercial paper and asset-backed securities. All of these emergency facilities had expired by the end of June 2010, but central bank liquidity swap lines were reopened in May 2010 in response to the crisis in Greece. The Fed also provided emergency assistance to Bear Stearns, AIG, and Citigroup over the course of the crisis; the Fed still holds assets from and loans to AIG and assets from Bear Stearns.
These programs resulted in an increase in the Fed's balance sheet of $1.4 trillion at its peak in December 2008, staying relatively steady since then. The Fed's authority and capacity to lend is bound only by fears of the inflationary consequences, which have been partly offset by additional debt issuance by the Treasury. High inflation has not materialized yet because most of the liquidity created by the Fed is being held by banks as excess reserves, but after the economy stabilizes, the Fed may have to scale back its balance sheet rapidly to avoid it. Asset sales could be disruptive, but the Fed has argued that it can contain inflationary pressures through the payment of interest on bank reserves, which it was authorized by Congress to do in 2008.
The statutory authority for most of the Fed's recent actions is based on a clause in the Federal Reserve Act to be used in "unusual or exigent circumstances." All loans are backed by collateral that reduces the risk of losses. Any losses borne by the Fed from its loans or asset purchases would reduce the income it remits to the Treasury, making the effect on the federal budget similar to if the loans were made directly by Treasury. It is highly unlikely that losses would exceed its other income and capital, and require revenues to be transferred to the Fed from the Treasury. To date, the Fed's crisis activities have increased its net income.
Two policy issues raised by the Fed's actions are issues of systemic risk and moral hazard. Moral hazard refers to the phenomenon where actors take on more risk because they are protected. The Fed's involvement in stabilizing Bear Stearns, AIG, and Citigroup stemmed from the fear of systemic risk (that the financial system as a whole would cease to function) if they were allowed to fail. In other words, the firms were seen as "too big (or too interconnected) to fail." The Fed regulates member banks to mitigate the moral hazard that stems from access to government protections. Yet Bear Stearns and AIG were not under the Fed's regulatory oversight because they were not member banks.
Some Members of Congress have expressed concern that certain details of the Fed's lending activities are kept confidential. H.R. 4173 (P.L. 111-203) adds conditions to the Fed's emergency lending authority, removes most GAO audit restrictions, and requires disclosure of the identities of borrowers with a delay. It also changes the Fed's role in the financial regulatory system (see CRS Report R40877, Financial Regulatory Reform: Systemic Risk and the Federal Reserve).