Federal Reserve's Liquidity Facilities isn't panacea

But the facilities haven’t been a panacea for three reasons.

• (1) Fed lending can’t solve the fundamental problem — the shortage of capital in the banking system... until the banking system is viewed as being sufficiently well-capitalized and is able to expand its lending activity significantly the economy will suffer.
• (2) Legal limits require the Fed to lend only when the would-be borrower offers sufficient collateral; it can’t lend unsecured or provide guarantees. (The Treasury can, however.)
• (3) Initiatives such as TALF (Term Asset-Backed Securities Loan Facility) are off to a slow start because of “the reluctance of investors to participate” in part because of “worries about what participation might lead to” given the political environment. Dudley pronounced these worries “misplaced.

http://www.newyorkfed.org/newsevents/speeches/2009/dud090418.html