"In essence, liquidity is just another name for money. And what happens when, for example, in this case the market was jittery and there were big concerns actually about financial solvency of many institutions, what the Fed did is took the steps they can to in essence pump more money into banks," says Dr. Walden, a North Carolina Cooperative Extension specialist.

"And so if there was a fear that banks were running out of money, the Fed said 'OK, here, we are in essence going to provide you with more money.' Now they don't do it free of cost. Usually what happens is the banks, in essence, have to borrow money from the Fed.
But the Fed makes it very practical for the banks to do that.

"And this is the tool that the Fed has used many, many, many times. They did it back in 2000, when people may remember there were concerns about the conversion to Y2K," he adds. "They did it in the big stock market crash of 1987.

"This is a role the Federal Reserve typically plays. Now there is a downside in that if the Fed does this too much, if they pump too much money into the banking system, down the road that can lead to either more bad loans, which is -- of course -- the problem we have now, or it can lead to higher inflation. So this is a tool that the Fed has to be very cautious in using."