The last resort

The Fed, in its rush to prop up the financial system, rescued both illiquid and insolvent financial institutions. That precedent may be hard to undo and over the long run, may lead to a collapse of market discipline, which in turn may sow the seeds of bigger bubbles and even more destructive crises.

Read page 137 for government's manipulation on interest rates

In recent crisis, deflation showed up.
In most cases, deflation isn't caused by a technological revolution; it is caused by a sharp fall of aggregate demand relative to the supply of the goods and the productive capacity of the economy.

Irving Fisher believed that depressions became great because of two factors:
(1) too much debt in advance of a crisis
(2) too much deflation in its wake

Page 140 for Fisher's argument of deflation and "great paradox"
deflation increases the real value of nominal debts. 
Debt deflation and debt inflation

The upshot of debt deflation is that debtors---households, firms, banks, and others---see their borrowing costs rise above and beyond what they originally anticipated. (page 141)

When economists talk about the futility of ordinary monetary policy, they refer to a "liquidity trap".
Open market operations (page 143)

A liquidity trap happens when the Fed has exhausted the power of open market operations. (page 144)
 Banks had money, but they did not want to lend it: uncertainty bred by the crisis, and concerns that many of their existing loans and investments would eventually sour, made them RISK AVERSE.

A glimpse of the liquidity trap (page 145)
TED spread: the difference between the interest rate on the short-term government debt of the US and the three-month LIBOR, the interest rate that banks charge one another for three-month loans.

To cut the spread, the Fed set up a series of new "liquidity" facilities that made low-cost loans available to anyone who needed them. Government made loans directly to ailing financial institutions. (page 146)

In this crisis, central banks ended up providing support to virtually all banks.

Quantitative easing: have the central bank intervene in markets for long-term debt in the same way that it does in market for short-term debt. (page 151-152)

page154
page 155 unintended consequences