Bagehot lender of last resort notion to the extreme

The idea of a central bank being the lender of last resort has been a central tenant of financial crisis management for years. Although it was much discussed but dismissed by the Bank of England at the turn of the century, the Walter Bagehot, Lombard Street view of last resort lending has been captured as the working doctrine of the Fed. The Bagehot vision is based on four principals:
lend "quickly, freely, and readily"
lend at a penalty rate to be the last resort
lend on good collateral
lend to liquidity but solvent institutions

We have moved beyond the Lombard Street vision to a new level of lender of last resort through unsecured lending to any A1/P1 institution in the commercial paper market. This lending has become not the last resort but the only resort.

A better representation of the Fed action is what was described by Willem Buiter as a variation of the lender of last resort, the market-maker of last resort. The Fed will be a fast acting TARP program for commercial paper. This is certainly a better more effective program than what was approved by Congress.

Treasury will work with the Fed to start a new SPV which can buy commercial paper. By providing a floor or market of last resort, there may be a willingness for others to match the behavior of the Fed to lend term loans. The current environment of overnight lending is not working and order need to be restored before we start coming to year-end.

Unfortunately, these plans which have significant uncertainty seem to have mixed reactions in the market. I am more glued to the Bloomberg money market page (BTMM) than the equity page and it is hard to see anything positive. Fed funds are above target even with the flood of liquidity. T-bill have moved to higher yields but there is little evidence that CP rates are changing.The money market curve is flatter than what you would expect given the risk premium. The money may be out there but it is still staying in the mattress.