As Credit Crisis Spiraled, Alarm Led to Action - Morningbull

Out of the blue, it seemed, there was a run on the $12.3 billion Putnam
Prime Money Market Fund. That meant the money fund contagion was
spreading. Because of huge withdrawals, Putnam decided it had to shut the
fund, and distribute the cash to shareholders. If it did not, the first ones out
the door would get a better deal than the laggards.
Executives of the Investment Company Institute and fund officials
scrambled to find a solution that would keep Putnam from having to take
that step, but they failed. On Thursday, Putnam shuttered the fund. (After
the government rescue plan was announced, it sold the fund, intact, to
another company, and investors did not lose a penny.)
The Fed Takes Action
Ben Bernanke had spent his career studying financial crises. His first
important work as an economist had been a study of the events that led to
the Great Depression. Along with several economists, he came up with a
phrase, “the financial accelerator,” which described how deteriorating
market conditions could speed until they became unmanageable.
To an alarming degree, the credit crisis had played out as his academic work
predicted. But his research also led Mr. Bernanke to the view that
“situations where crises have really spiraled out of control are where the
central bank has been on the sideline,” according to Mark Gertler, a New
York University economist who has collaborated with Mr. Bernanke on
some papers.
Mr. Bernanke had no intention of keeping the Fed on the sidelines. As the
crisis deepened, it took more aggressive steps. It added liquidity to the
system. It opened the discount window — the emergency lending facility
that had been reserved for troubled banks — to investment banks. It also
agreed to absorb up to $29 billion in Bear Stearns losses and made an $85
billion loan to keep A.I.G. afloat.
Representative Barney Frank, the Massachusetts Democrat who leads the
House Financial Services Committee, asked Mr. Bernanke if the Fed had
$85 billion to spare. “We have $800 billion,” Mr. Bernanke replied,
according to Mr. Frank.