Over the years, the Federal Reserve has become very smart and capable. It is also very important since it is the “lender of last resort”—a big help in financial crises. That is why the Fed involves itself in preventing and managing these crises. The Fed never has anything to do with creating crises—otherwise we would mention it in this Joint Statement.

The Treasury and the Fed agree they should cooperate to resolve crises. The Fed is indispensable in preventing and managing financial crises. (Did we mention this?) The Fed has already minimized the damage in the current crisis. It and the Treasury will continue to help improve credit market functioning (i.e., getting lenders to lend and borrowers to borrow—the free market has never been able to do this). We will also prevent institutions from failing if their failure would hurt the system. We will also help to stabilize and repair the financial system. The system is not capitalism or the free market. The system is big firms not failing.

The Fed will avoid taking too much risk on itself. The Fed will stay away from credit allocation, leaving that to the Treasury, if necessary. The Fed will continue to foster “maximum sustainable employment and price stability”—i.e., to pursue its Congressional mandate. We thought we should mention this.
Treasury has in place a special financing mechanism for the Fed (called the Supplementary Financing Program). This “helps the Federal Reserve manage its balance sheet.” It’s sort of like how they help General Motors and AIG. But the Fed and Treasury want laws passed so the Fed can “sterilize the effects of its lending or securities purchases on the supply of bank reserves.” (We’re too nervous about this particular topic to explain it further in this statement.)

The Treasury and the Fed agree they won’t permit “disorderly failure of systemically critical financial institutions.” That means any big failures that would embarrass the elite financial regulators, the politicians directly responsible for financial regulation and, of course, the executives in charge of the precarious institutions themselves.
As our proposal for avoiding future financial crises, we have come up with this idea. You have probably already heard it. The Congress, the Treasury, and the Fed will work to create a “regime” to anticipate and prevent any future really big, really embarrassing financial failures. (This never occurred to us before, but it seems like a good idea now. It should do the trick.)

By the way, all these special things we’ve done so far—like ballooning the Fed’s balance sheet beyond insanity and like lending incredible sums to financial institutions on collateral we never would have allowed before—we’ll try to undo all that stuff when we can.