During the crisis, even money market mutual funds were experiencing runs because people were afraid of holding bank paper indirectly.

I think the credit easing component of the Fed’s activity was designed to increase the supply of credit to the private sector, with some targeted, albeit limited programs, along the lines of the business requirement in your example (e.g. commercial paper funding). Can’t speak to how effective it’s been.

(Plus TARP capital for banks, which has been controversial to say the least, in terms of its effectiveness as a bank lending catalyst.)

I’m not sure I follow your analogy exactly, but…

The initial sale of treasuries made some sense to the degree the Fed wanted to pursue “credit easing “. They did that initially through asset switching rather than liability expansion, being somewhat constrained in the latter – it took some time to get approval to pay interest on reserves, which was required for lower bound control on the fed funds rate (although that didn’t work so well because some non-banks like Fannie and Freddie still held non-reserve non-interest earning balances at the Fed.) Also, there was some political unease with the idea of building up excessive treasury balances at the Fed as the offset to asset expansion. When they got the go-ahead to pay interest on reserves, they started more aggressive balance sheet expansion, including excess reserve expansion. They’ve also wound down much of the extraordinary Treasury funding to date, effectively replacing that with excess reserve expansion.

There’ve been a lot of balance sheet changes over the past year. Interestingly, the net increase in size is ball-park equal to the increase in treasuries, which correlates roughly with their announced treasury purchase program.

My interpretation of it is that they’ve held their own on “credit easing” (although the composition has changed significantly, with substantial MBS purchases over the past year, and the wind down of some other programs), and they’ve moved ahead with “quantitative easing” as traditionally defined – i.e. increasing treasury holdings and increasing excess reserves as a result.

But I’m not sure that addresses your point, which I may be missing …

Question: I know it is spilled milk, but do you think this selling of Treasuries by the lender of last resort over that time was helpful? If you were a business and some customers were stringing you out 60-90 days so you go to your lender for a 60-day draw and instead they force you to buy a CD? That doesnt sound like any type of easing to me, “quantitative” or otherwise.

“during a run, access to funds via the reserve account dries up as banks with excess reserves refuse to lend to the bank experiencing the run”

Not the other banks directly, so much as the wholesale market customers of the other banks refusing to deposit with it or roll over its paper. That depletes reserves just as much.

And the FDIC can shut a bank down even if it is still liquid – i.e. still has sufficient funds in its reserve account, even with collateralized borrowing from the Fed. The FDIC can shut it down if it is deemed insolvent – i.e. no capital.