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I’ve been recommending the following for the Fed for quite a while (see Proposals for the Fed):

  1. Lower the discount rate the Fed Funds rate and:
    1. Accept a pledge of any bank legal collateral from any member bank.
    2. Impose no restriction on quantity borrowed.
    3. Impose no restriction on the duration of any member bank borrowing.
  1. Likewise, remove collateral restrictions on the TAF operations.
    1. Set the maturity and interest rate for each TAF operation.
    2. Leave demand open-ended, rather than the current policy of limiting quantity.

Failure to implement the above shows a failure to understand fundamental monetary operations.

These policy changes would alleviate critical liquidity issues, and not, per se, alter net bank reserve demand (not that the size of the bank reserve ‘matters’).

Part of the current crisis is due to the failure to implement the above changes that would have:

  1. Normalized bank liquidity.
  2. Prevented the forced sales of investment grade, unimpaired, bank legal assets.
  3. Allowed banks to finance bank legal assets for third parties.
  4. Allowed markets to function to deleverage impaired assets.

The Fed is slowly moving in that direction, but, unfortunately, not proactively to ‘fix’ a flawed institutional structure, but reactively as things fall apart in no small part due to lack of action:

Federal Reserve lowers standards for collateral from primary dealers

The collateral eligible to be pledged at the Primary Dealer Credit Facility (PDCF) has been broadened to closely match the types of collateral that can be pledged in the tri-party repo systems of the two major clearing banks. Previously, PDCF collateral had been limited to investment-grade debt securities.

The collateral for the Term Securities Lending Facility (TSLF) also has been expanded; eligible collateral for Schedule 2 auctions will now include all investment-grade debt securities. Previously, only Treasury securities, agency securities, and AAA-rated mortgage-backed and asset-backed securities could be pledged.

These changes represent a significant broadening in the collateral accepted under both programs and should enhance the effectiveness of these facilities in supporting the liquidity of primary dealers and financial markets more generally.

Also, Schedule 2 TSLF auctions will be conducted each week; previously, Schedule 2 auctions had been conducted every two weeks. In addition, the amounts offered under Schedule 2 auctions will be increased to a total of $150 billion, from a total of $125 billion. Amounts offered in Schedule 1 auctions will remain at a total of $50 billion. Thus, the total amount offered in the TSLF program will rise to $200 billion from $175 billion.

The Board also adopted an interim final rule that provides a temporary exception to the limitations in section 23A of the Federal Reserve Act. It allows all insured depository institutions to provide liquidity to their affiliates for assets typically funded in the tri-party repo market. This exception expires on January 30, 2009, unless extended by the Board, and is subject to various conditions to promote safety and soundness.


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9 Responses

  1. After reading some of rothbard’s great depression memes – I already mistrust my banker to do the wrong thing and hurt me and the local and global community to enrich himself – like making a loan he knows will collapse and waste time, money, resources so that he can get his bonus and the poor fishing guy in norway will be the ultimate bag holder on this securitized garbage – now the banker has been told he can expand his bag of tricks. I have seen too many episodes of Andy Griffith where bad things happen when you give the big banker too much power over the local community. Hank Paulson has a brother in goldman sachs, I don’t care what market reforms and institutional structure you set up Warren, I know at the end of the day you are going to do everything you can to make sure Sada gets the advantage over me. The ties that bind.

    Warren some of your points from that other page:

    “Stop worrying about US solvency (including solvency of social security). ”

    This is silly – what would you expect any person in government office (from congress to us marshals to us military to us postal workers that all exist by the grace of the US gubbment tit) to think of silly jimmy buffet island guy like you that talks about wrecking thier “system” CIA jackals and “good shephers” whose power and status extend from US gubbment solvency – they won’t like people like you that say to stop worrying about this stuff – the kill world leaders and millions of citizens to make sure solvency stays intact – you are starting to sound like economic “hit man” john perkins. You know the founding fathers were smart guys – but even they didn’t try to take on the euro boys from within – they did a monty python and ran away – sadly for you today – short of moon colonization – I don’t see how you repeat thier method of success.

    Many politicians like the status and power (5,000 dollar hookers aside) that come with office – the taxpayer funded trips to ireland, germany, iraq – etc etc in the nice jets. Getting into that expensive restaurant in New York because you are a US senator instead of having to wait in line for 3 hours if you are just a regular joe etc etc This is not a new Meme, ben franklin abandoned his homebody wife so he could go to france for a few decades and be a big dog head of state and party with the prostitutes in paris. To give you an example you might can relate too Warren, there is only so much space out in the marina off your island – a US senator probably can get the right strings pulled to dock his yacht their over the weekend versus joe 6 pack. IE there is one space left to dock a big yacht to celebrate CARNIVAL in the virgin islands, brad pitt, warren mosler, warren buffet and Prez bush all show up in their yachts – who gets the space? Will you get it Warren?

    “Reduce energy consumption by lowering the national speed limit to 30 mph for private motor vehicle transportation over three years:
    Reduces driving.
    Decreases energy consumption per mile.
    Redirects where people live due to the implied price of travel time.”

    LOL! Yet warren makes supercars that go really fast instead of investing time and money in extremely fuel efficient solar cars that go very slow – stop with the contradictions – what is good for the goose is good for the gander – it makes it hard for me to take you seriously – your ACTIONS speak louder than your words Warren.

  2. hey, my latest supercar gets over 27 mpg highway, mate!

    i’ve proven that light weight high strength vehicles are feasible and have tried to work with detroit to get them to do it.

    however, i’m not proposing individuals try to fight the institutional structure at a personal level. it’s a fallacy of composition. if you cut down on fuel use, someone else will increase their consumption. the monetary system will burn up all the fuel we allowed to be produced without a macro policy to cut overall production.

    by the way, i don’t eat baby carrots and baby corn- i’m not totally heartless!

  3. LOL! You always make me laugh Warren – tanks!

    “however, i’m not proposing individuals try to fight the institutional structure at a personal level”

    This is EXACTLY why I think you will fail, men lose thier sanity in herds, but regain it one by one. I vote for a grassroots levels bottom up reform with you being the “jerry maguire” to start the revolution! LOL! I gave up corn long ago! There was this episode of star trek, where the whole FLEET of starships tried to take on the borg (like you are suggesting) the federation got obliterated – in another episode they took one borg – his name was hugh – and changed him – and he went back into the collective and from the inside out ground level up he changed the beast. Your way is doomed to failure, you are striking at the head of the beast and it will always defeat you.

    “In the eyes of empire builders men are not men but instruments” ~ Napoleon Bonaparte

  4. PS, I saw lee iacocca riding an electric bike and give up on cars, he didn’t go to detroit and try to say lets build a slightly better car, come on Warren, lets start thinking outside the box. You can do it, I have faith in you! I haven’t owned a car in 7 years, I didn’t need the gubbment to tell me to do it either, I didn’t need my greed for money to persuade me either – perhaps this meme you have that if we make MONEY incentives in different areas that our people will do better things, I say bring your children up not to be so money hungry, then whatever the big ole gubbment tried to do with their MONEY CARROT stick won’t work on indepedent free thinkers like Harrison Bergeron.

  5. “i like my response- offer a job to anyone willing and able to work at a fixed wage.”

    Warren here is Eddie Murphy as Velvet Jones at the urban school of technology promoting his book – How to be A Ho:

    All my girlfriends are willing to lay on their back and make big money practicing the oldest profession in the world, how come you talk about legalizing drugs but not legalizing the oldest profession in the world? Just think of the women that sit around “IDLE” all day watching soap operas or american IDOL that could be put to productive use.

  6. http://caribbean.craigslist.org/ers/

    http://caribbean.craigslist.org/ers/828045637.html

    Kate is cute no? And she is in your nieghborhood this month warren – like jimmy buffet said – don’t be dumb – get you some!

    This is what I want to spend my money on, or get up and go to work for and add to the borg collective, but I need YOU Mr. Mosler to get the laws changed and you don’t even talk about it. So this donkey is just gonna sit down.

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