The discount window has a historical stigma to it because basically by using it you are announcing you cannot get cash anywhere else in the market. Therefore they keep the details secret (along with the banks CAMELS ratings, and other useful information) but provide some aggregate data. I think it will be very interesting to track the usage of the discount window. A huge increase in borrowing will be an indication of a serious problem in the credit markets. The discount rate used to actually be below the fed funds rate by a half-point but you had to prove that you could not obtain funds elsewhere before they would let you borrow (to discourage use) and there was apparently more approval work involved. In 2003 they changed the discount rate to sit above the fed funds rate and took away most of the prerequisites. The higher rate is suposed to discourage the casual use of it now. Basically what they did today was almost entirely symbolic. It just means Countrywide and other floundering banks can borrow (probably 80 cents on the dollar) from the Fed at 5.75 instead of 6.25. I would think that half point is not significant to survival of troubled entities at this point. The discount rate was the warning shot. The fed blinked and demonstrated they will change their bias to bail out the big players. But I think they also signal "calamity" to those in the know.
Subject to the bearer being a known member of the moral hazard appreciation society. Everyone else can just take their reposessions notice like a man. Markets can go up as well as down, tsk tsk it's not as if you werent told. Join the society did you say? Who was your father?, nope sorry, don't recognise that name.
Interesting post Scribe, thanks. Here's an alternative interpretation of the Fed's actions. I think they are still quite concerned about stagflation and desperately do not want to lower the funds rate. Today's move was a head-fake, trying to break the credit logjam without actually doing anything inflationary. If the Fed was really capitulating, if they really were convinced that inflation is no longer a concern, I think the long end of the yield curve would have been down today. Instead it was up. Bond traders are still worried about inflation. That's a shot across the Fed's bow, IMHO. Martin
what about subprime paper?the fed might have to became sucker of last resort if some bank is hiding big losses