Washington is ratcheting up its activist response to a liquidity crisis that shows no signs of peaking. The Federal Reserve Board has adopted in rapid-fire order a series of monetary policy changes that would have been unimaginable before the current emergency. Simultaneously, the Treasury Department and the other financial regulators have wound up a seven-month effort to rewrite mortgage lending and securitization rules to make sure the missteps that created the current crisis are not repeated. A lot of laissez faire ideology is going up in smoke.

The Fed was forced into a series of emergency actions by the fact that repeatedly lowering the fed funds rate was not having the desired effect. Despite achieving low rates throughout the market, the Fed had to face the fact that some borrowers — and some types of collateral — were effectively shut out. The central bank’s response needed to be tailored to those borrowers’ needs.

Back in December, the Fed reacted by implementing a term auction facility designed to allow borrowers to obtain term credit in addition to the Fed’s traditional overnight credit sources. Auction amounts were set at $20 billion and loans were fully collateralized. This facility has helped, but apparently not enough to stem the crisis.

In the next step, taken a week ago, the Fed increased the amounts available through the term lending facility to $100 billion and promised to continue to maintain the program for at least six more months. The Fed also initiated a $100 billion series of term repurchase transactions that can be secured by Treasury securities, agency debt, or agency mortgage-backed securities.

When these actions turned out to be too weak — some media sources were predicting that Fannie Mae might need a bailout — the Fed went all-out. It announced creation of a new Term Securities Lending Facility (TSLF) that will lend up to $200 billion of Treasury securities to primary dealers for a term of 28 days. This debt can be secured by federal agency debt, federal agency residential mortgage-backed securities, and AAA/Aaa-rated private-label residential mortgage backed securities. Overseas central banks also acted in concert with the Fed.

This program “is intended to promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally,” the Fed declared. The markets responded with exuberance — for one day, at least.

The Fed’s actions effectively make troubled mortgage-backed securities more attractive by allowing their use as collateral for borrowing Treasury securities. If all goes as planned, the troubled securities’ prices will go up, enhanced liquidity will drive mortgage rates lower, and the markets will return to a more normal state of liquidity.

Of course, if all had gone as planned, the Fed’s earlier efforts would have been enough to turn around the markets. The Fed has carefully structured its latest program to avoid actually buying mortgage-backed securities — a step it resists because it would look too much like an outright bailout for Fannie Mae and Freddie Mac. However, if conditions deteriorate further, pressure on the Fed to actually acquire mortgage-backed debt will likely increase.

But that’s a worry for another day. Right now, all eyes are focused on the immediate question — how big a rate cut the Open Market Committee will authorize at its March 18 meeting.