central bank to some credit risk, 3 but the short tenor and restriction to high - quality companies makes the risk slight. the federal reserve ’ s term asset - backed securities loan facility ( talf ) represented a rather more radical departure. under the talf, the federal reserve made medium - term loans to investors against highly - rated securities backed by consumer and business debt, with the aim of increasing the availability of consumer and business credit. even though there is a haircut on the securities, the credit risk to the central bank is potentially higher under this programme ; that risk was effectively underwritten through the provision of credit protection by the us treasury. many of these extraordinary actions were designed to be self - liquidating as conditions normalise : central bank or government support becomes more expensive than market finance, or else is specifically time - limited. a central bank should not offer special support to particular private institutions or markets indefinitely, unless it is seeking to offset an identifiable market failure. otherwise, it just ends up distorting the market structure. moreover, to the extent that there is a market failure or distortion present, in the first instance it is surely the job of government, rather than the central bank, to address that market failure. in addition, anything that involves the central bank favouring particular businesses or sectors of the economy or exposing the consolidated public sector balance sheet to credit risk takes it into territory that is inherently political and risks inviting political intervention or limitations to its independence. while there should be little need for extraordinary liquidity and credit support once normal times return, there are potential lessons from the crisis for the execution of conventional monetary policy. before the crisis, and with policy rates averaging somewhere in the 4 – 5 per cent range, central bankers generally believed they had plenty of room for manoeuvre to offset all but the most severe adverse demand shocks. but the sharp increases in a range of credit spreads from the onset of the crisis in august 2007, and especially after the collapse of lehman brothers in the autumn of 2008, meant that policy rates had to fall sharply merely to though in any case, the bank of england ’ s asset purchases are indemnified against loss by hm treasury. maintain the pre - existing levels of key borrowing rates, 4 let alone lowering them in order to stimulate aggregate demand to counteract the substantial contraction over 2008 q4 and 2009 q1. as a result, many monetary policymakers soon found themselves with policy rates at, or near, the zero interest rate lower bound

high volatility has had the opposite effect ; that is consistent with the cross - country evidence of ramey and ramey ( 1995 ), who find that higher volatility tends to be associated with lower growth. the idea that periods of economic stability encourage exuberance in credit markets, thus sowing the seeds of their own destruction, is a key part of minsky ’ s theory of recurring financial crises ( see e. g. minsky, 1982 ). the results here provide some empirical evidence for such a dynamic process. moreover, to the extent that better policy accounted for the great moderation, it provides a second, indirect, channel whereby policy may have contributed to creating the conditions conducive to a subsequent financial bust. but it would clearly be a mistake to conclude that policy should aim to induce fluctuations in the macroeconomy in order to prevent financial market participants becoming too confident about the outlook! the right moral is surely that policy makers need to be most vocal about the risks to the outlook when things appear to be going well, and to take appropriate restraining action if needed. 3. the instruments of monetary policy dealing with the fallout from the banking crisis has pushed central banks in the affected jurisdictions into uncharted waters. the top panel of table 1 summarizes the wide variety of measures adopted by some of the major central banks, while chart 5 illustrates the associated expansion in the balance sheets of the federal reserve, the european central bank and the bank of england. the most immediate response was to offer liquidity support to the banking sector, especially as the crisis intensified in the wake of the collapse of lehman brothers and the rescue of american international group. measures adopted included widening access to discount window facilities, expanding the range of eligible collateral and counterparties, extending loan tenors and introducing foreign currency swap lines. as the lending in these operations is normally over - collateralised, there is essentially negligible credit risk to the central bank. in addition to these classical, if somewhat expanded, central banking support operations, a number of central banks – most especially the federal reserve, but also the european central bank and the bank of england – undertook less conventional actions aimed at improving the operation of particular, temporarily dysfunctional, markets. for instance, the federal reserve and the bank of england both bought high - quality commercial paper, reducing the risk that a borrower could not raise new funds to repay maturing paper and thus also encouraging private investors to lend. this exposes the