Where is the Fed responsible ?
For not performing its regulatory function.
For taking MBS on its books in exchange for Treasuries
For now proposing to pay the banks interest on reserves held at the fed
What is the Fed responsible for - the ongoing zombification of banks, just like Japan.
There is nothing blameworthy in accepting collateral for repurchase agreements that are accomodative to the rest of the market. The Fed will return the securities and collect the usual interest on the hold. It is merely easing the counterparty banks' Basel reserve requirements for the duration of that hold. Do you know that it was an innovation in the depression to let the Fed hold treasuries? Originally it was suppose to rediscount banker's acceptances (lol). That was part of a "real bills" doctrine that thought such debt reflected a "more underlying", less merely monetary, demand.
Asset restrictions are purely conventional and at bottom utterly frivilous, in such things. The Fed lends freely or it doesn't. If it does, anyone *solvent* can become liquid.
The banks aren't undergoing mystico-magical contagion. They are simply increasing their ratio of lower risk reserves to total assets. They will earn out all credit costs of the present smash up easily, at present market spreads. Debt risk is now a buy, not a sell, because their pulling back has left so much paper go begging, and the price of said paper has rationally and immediately adjusted.
This is not remotely what happened in Japan, where prices did not adjust at all, rates went to zero and stayed there, banks deliberately hid all losses, and threw good money after bad merely to avoid revealing loan losses. Instead we have huge, high profile write-offs the instant market quotations turn. What we are seeing, in fact, is the greater rationality and openness of the open and market based Anglo-Saxon financial system. And you are shortly to see the resulting greater robustness, amply demonstrated.
All the silly people waiting around for it to cause the great depression in reruns, are just silly, and do not understand how the system works. At present credit spreads, you'd have to be brain dead to lose money as a banker. Granted, many did a passable imitation in the previous 3-5 years. But dumb and loss came from 0.1% spreads, and health and soundness will come from 2.5% spreads, as inevitably as the sun coming up.