From the Fed’s theoretical framework, their best move is:

♦ Cut the discount rate to 4.5

♦  Leave fed funds at 4.5

♦ Remove the stigma from the window

♦ Allow term window borrowing over the turn

♦ Accept any ‘legal’ bank assets as collateral from member banks in good standing

♦ Allow member banks to fully fund their own siv’s

♦ Do not allow banks to do any new sivs or add to existing siv assets, and let the existing assets run off over time.

This would:

♦ Close the FF/LIBOR spread stress for member banks

♦ Support market functioning

♦ Support portfolio shifts to the $

♦ Temper inflation pressures

♦ Restore confidence in the economy

♦ Regain Fed credibility


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