On December 12, 2007, the Federal Reserve announced its entry into emergency “non-standard” policy measures. In a belated attempt to “address elevated pressures in short-term funding markets”, the US central bank would begin auctioning reserve funds “against the wide variety of collateral that can be used to secure loans at the discount window”. The Term Auction Facility (TAF) would become, in essence, the first attempt to work around the Discount Window.

At the same time, the Federal Reserve would coordinate with four other central banks, Bank of England, Bank of Canada, European Central Bank, and Swiss National Bank, so as to ensure dollar funding could be made available by those foreign public institutions – to foreign private institutions. Distracted by “toxic waste”, no one really thought to ask why there was, or how there could be, a massive global-scale dollar problem requiring something entirely new.

In December 2007, and over the months that followed, all anyone cared was that officials were doing big things so as to prevent the occurrence of bigger things. Yeah, it’s bad but they’re working on it, right?

For a time even the Treasury market was fooled. You are taught from the first Economics class that the central bank is central. Greenspan in the late nineties was the “maestro” and in 2002 Bernanke said they would use the printing press if push ever came to shove. In late 2007, global markets were being shoved all in the wrong dangerous direction and in rode Bernanke to the rescue with his press.

Or what he called a printing press, anyway.

From that particular week in December 2007, Treasury futures bought it. Even throughout the terrible quarter of Q1 2008, the one that saw astonishing setbacks culminating in Bear Stearns, even the first major contraction in GDP in twenty years, Treasury futures were betting the Fed would still get it right.

It is funny looking back on it, how for quite a long time the market kept affirming failure; the Fed would do something only to be forced to raise the stakes time and again. The market, including UST’s in the spring of 2008, looked upon all that as the mere expense of time before the world’s central bankers would eventually get it right. It was entirely upside down.