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It has been suggested that the government should increase the effective supply of public short-term debt in order to meet the demand by institutional cash managers for safe short-term debt. If the government eliminated private issuance of short-term debt by issuing enough public short-term debt to satisfy this demand, then there could be no runs and no contagion. The same result could be achieved if the remaining short-term debt of the financial system was so small that runs would not be significant. These policies can be characterized as “crowding out” private short-term debt. This chapter discusses crowding out by the Treasury and the Federal Reserve. The Treasury could crowd out runnable private short-term debt by replacing a certain amount of long-term Treasury debt issuance with shorter term Treasury debt. Investors that would otherwise buy and hold private short-term debt would instead buy Treasuries. The Federal Reserve could “crowd out” private short-term debt, using its new tools of monetary policy—interest on excess reserves (IOER) and reverse repurchase agreements (RRPs).

During the financial crisis, central banks have made various changes to their standing facilities and open market operations. First, most central banks of large advanced monetary areas switched from a symmetric corridor approach to one in which the short-term interest rate is pegged to the remuneration rate of excess reserves (e.g. in the form of a deposit facility). Excess reserves dominated the money market mostly because of large-scale asset purchase programmes. The various reasons for central bank outright purchase programmes in a financial crisis are reviewed. Central banks also made more convenient their open market credit operations, namely by extending maturity and switching from auctions to so-called fixed-rate full allotment procedures.