jmc

Define the points $A$, $B$, $C$ , and $D$, $E$, and $F$ as shown so that $AC$ is perpendicular to the base of the pyramid. Segment $DC$ is a leg of the isosceles right triangle $CDF$ whose hypotenuse is $8\sqrt{2}$. Therefore, $CD=8\sqrt{2}/\sqrt{2}=8$. Applying the Pythagorean theorem to triangle $ACD$ gives $AC=6$. Since $BC=3$, this implies that $AB=3$. By the similarity of $ABE$ and $ACD$, we find $BE=4$. The diagonal of the smaller square is $2\cdot BE=8$, so its area is $8^2/2=32$. The volume of the pyramid is $\frac{1}{3}(\text{base area})(\text{height})=\frac{1}{3}(32)(3)=\boxed{32}$ cubic units.