The Fed brought out its big guns today, announcing it will be purchasing both secured (asset backed) and unsecured commercial paper in significant quantities. Treasury will be funding the bulk of this, so it isn't necessarily equivalent to printing money. It won't be up and running for at least several days, but once it kicks in we ought to see a significant decline in credit spreads and a major improvement in market liquidity conditions. This is a move that optimists only dreamed about a few weeks ago but dared not hope for.
Already we see some signs of relief: The VIX index has retreated from yesterday's 58 to 48 today. The TED spread has dropped from 386 to 330 bps. 2-year swap spreads are down to 136 from their high last week of 167. 10-year swap spreads are 63 today, which is just a few bps above the lowest level we have seen in the past year. Nevertheless, the equity market is not impressed. I'm guessing the markets are very much in "show me" mode, having been burned several times over the course of this crisis. This time they won't give anyone the benefit of the doubt until there is concrete evidence that this new plan is making a difference.
Here's the plan in a nutshell: the institutional side of the fixed income market (represented by the financial commercial paper market) is paralyzed with fear, as reflected in extremely wide credit spreads and a severe lack of liquidity, and the government is going to wade in and buy up a large portion of the bonds that nobody seems to want, exchanging Treasury securities for commercial paper. It's equivalent to the government saying that it will bear the brunt of the credit risk, taking it off the shoulders of the private market and socializing these risks in the process. If the economy doesn't collapse, it's reasonable to think that the bonds the Fed buys could more than cover the interest cost of the Treasury bonds sold to finance the effort.
It's not something we would wish for in normal times (think major moral hazard here), but at times of a crisis that is largely of the government's own making, it's probably the least worst solution.