long - term rates, then these purchases should also ease financial market conditions. so how have the fed ’ s facilities worked in practice? in general, i think the facilities have worked quite well. in those areas where the facilities have been active, we generally have seen an improvement in market conditions. but the facilities have not been a panacea for three reasons. first, the facilities cannot address the fundamental problem – the shortage of capital in the banking system. the facilities can slow down the deleveraging process, but until the banking system is viewed as being sufficiently well - capitalized and is able to expand its lending activity significantly, the limits on credit availability caused by an impaired banking system will make it more difficult to generate a sustainable economic recovery. second, there are limits on what the fed can do legally. for example, the fed can only lend if it is secured to its satisfaction. there has to be sufficient collateral available. the fed cannot lend on an unsecured basis or provide guarantees. and the fed cannot purchase assets other than treasuries, agencies and agency mbs, and short - dated general obligations of states and municipalities. third, the effectiveness of some of the fed facilities have been undercut by stigma – the discount window is the best example of this – or by worries about what other strings are or might be attached to the use of the facilities – the talf comes to mind in this respect. one reason why the talf has gotten off to a relatively slow start is the reluctance of investors to participate. issuers ’ interest, not surprisingly, dwarfs investor demand at this stage of the program. some investors are apparently reluctant not because the economics of the program are unattractive, but because of worries about what participation might lead to. the tarp loans to banks led to intense scrutiny of bank compensation practices given that talf loans are ultimately secured by tarp funds, investor anxiety about using the program has risen. my own view is that these fears are misplaced. the tarp funds in the talf program only come in on the backend of the program when loans are put back to the fed. the lending to investors on the front end is completely a federal reserve program and operation. that being said, i understand the reasons for the anxiety given the political discourse on this subject. i think it is worth emphasizing that actions that lead investors to shun taking risk, especially in this environment, are ultimately detrimental to the ability of households and businesses to secure

credit at reasonable borrowing rates. the federal reserve ’ s liquidity facilities and asset purchase programs have led to a substantial expansion of the federal reserve ’ s balance sheet since september 2008. currently, the fed ’ s balance sheet totals about $ 2. 2 trillion, up from about $ 900 billion last fall prior to lehman ’ s failure. in thinking about this balance sheet expansion, i would make three broad points. first, in my mind, the goal is not the expansion of the balance sheet per se, but the objectives that i laid out earlier. in this respect, the expansion of the balance sheet differs considerably from japan ’ s experience with quantitative easing. in the current circumstance, the federal reserve ’ s liquidity programs act on the asset side of the balance sheet as the fed lends funds against less liquid collateral and expands its asset holdings via purchases of agency debt, agency mbs and treasuries. the goals are to slow down the pace of deleveraging to reduce the risk of catastrophic failure, improve market function and ease financial market conditions. in contrast, the bank of japan worked on the liability side of the balance. their goal was to expand the amount of excess reserves held by the banking system so that the banks would be more willing to expand their credit provisions. although the fed ’ s activities have led to a big jump in excess reserves, this increase is incidental – a byproduct rather than goal of the asset - oriented programs. second, as a consequence of this my point, the size of the balance sheet, is not a good metric for measuring the impact of the fed ’ s facilities or the amount of stimulus that the fed is providing via these programs. for example, consider the impact of the fed facilities on rollover risk. a fed facility that eliminates rollover risk might not be used at all. there might be no balance sheet impact. nevertheless, the facility could have an important impact on market function and financial market conditions. it is not possible to mechanically map the size of the balance sheet back onto the impact on financial market conditions. that is because the balance sheet size is being driven by a large number of different actions. is a dollar of taf lending equivalent to a dollar extended through the cpff or to a dollar of treasury purchases? how important is the pdcf? it backstops lots of lending, but outstanding amounts are very low. the differences between the various programs and activities mean that the balance sheet size should be interpreted in