Expansion of Fed Balance Sheet ("Credit Easing")
The Fed can electronically create money and use it to lend against collateral of various types, such as agency mortgage-backed securities or asset-backed commercial paper. This is effectively "printing money" and increases the money supply, which under normal economic conditions creates inflationary pressure. Ben Bernanke called this approach "credit easing", possibly to distinguish it from the widely used expression Quantitative easing, which however originally also referred to the expansion of "credit creation" (reference: Richard Werner, Keizai Kyoshitsu: Keiki kaifuku, Ryoteiki kinyu kanwa kara, Nikkei, Nihon Keizai Shinbun, 2 September 1995) . In a March 2009 interview, he stated that the expansion of the Fed balance sheet was necessary "...because our economy is very weak and inflation is very low. When the economy begins to recover, that will be the time that we need to unwind those programs, raise interest rates, reduce the money supply, and make sure that we have a recovery that does not involve inflation."
Both the actual and authorized size of the Fed balance sheet (i.e., the amount it is allowed to borrow from the Treasury to lend) was increased significantly during the crisis. The money created was funneled through certain financial institutions, which use it to lend to corporations issuing the financial instruments that serve as collateral. The type or scope of assets eligible to be collateral for such loans has expanded throughout the crisis.
In March 2009, the Federal Open Market Committee (FOMC) decided to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of government-sponsored agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion during 2009, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities during 2009.
Read more about this topic: Federal Reserve Responses To The Subprime Crisis
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