I was asking a question to Prof. O'Driscoll on this Prof. Boettke's post on the public choice dangers of monetary policy (post and comments strongly suggested). Then I realized that I didn't understand its comment, as I thought he was saying that the Fed has sterilized monetary interventions in Fall 2008 (instead of BEFORE Fall 2008).
However, this is a 15m work on Fed FRED data, and I post it as a summary.
Fed Policies in Fall 2008.
Target interest rates: in Fall 2008 it fell from 2 to 0. This is expansionary.
Monetary base: in Fall 2008 it came from 850 to 1700b$. This is expansionary, too. Quantitative easing implies that monetization is not sterilized, otherwise is a portfolio rebalance (buy toxic waste, sell t-bills). The Fed would have run out of good collateral.
Extra facilities like TAF, TALF, MMIFF, AMLF, CPFF, created from Summer 2008 to Fall 2008, created reserves. I'm quite sure about that regarding TAF (and the already existing, in Fall 2008, PDCF), the others are a little bit to complicated for me. The already existing TSLF was not a monetary facility, but a credit transformation facility.
One element remains out of sync with the other policies: interest payments on deposits at the Fed, started in mid Oct 2008.
However, this rate fell to zero (dot something) after two months of existence, so I wouldn't consider it relevant at the margin: it's a 0.0025 * M0 gift for the banks, i.e., less than 5b$/y.
If return rates were not (risk adjusted) zero elsewhere in the economy, the substitution effect would have been quite nil. If they were zero elsewhere in the economy (like in New Keynesian ZIRP models with negative real natural rates), this is what has to be explained.
Besides, the CPI started falling before interest payments on reserve (July 2007), and deflation accelerated in September 2008, before interest on reserves. Inflation turned back in early 2009, so the eventual effect of this policy on the CPI was very short lived, if existent.
Interest on reserves is somehow a mystery, and I can only explain it as fear of inflation, but with 0.25% interest paid, I think it's also practically irrelevant.
Why did they do it? The standard answer is "to enlarge the Fed balance sheet without losing high quality collateral, i.e. t-bills", but why did they feared this? Just expand M0 as if there is no tomorrow. Japan already did it, and with zero effect (it makes the public debt marginally less expensive and it helps overvaluing toxic waste).