looks a lot like the recommendations Karim emailed to them:

An article in the Financial Times:

Fed officials have dusted down this proposal and adapted it to address the current credit market crisis.

Vincent Reinhart, a fellow at the American Enterprise Institute and former chief monetary economist at the Fed, says this kind of auction facility would allow the Fed to provide funds directly to a much larger group of banks than the limited number of primary dealers who participate in open market operations, against a wide range of collateral, without the stigma of the discount window.

“I think it would be very positive,” he says. Banks in need of liquidity could acquire funds relatively anonymously, while the large number of participants with direct access to Fed money would encourage arbitrage to exploit the gap between cheap Fed money and high interbank rates.

Moreover, the Fed could auction funds at whatever term it wanted to in order to target liquidity at particular term markets – for instance, the market for one-month loans. It would have the option of either auctioning a fixed amount of funds, or offering to supply whatever funds were needed at a target rate.

The intended interest rate spread over the Fed funds rate is not known. If the Fed decided to auction loans at or only slightly above the Federal funds rate, it would risk subsidising weaker banks, which normally pay a premium to borrow in the interbank market.

However, Mr Reinhart says this could be dealt with by varying the amount of collateral required in return for loans based on the creditworthiness of the bank seeking funds.


3 Responses

  1. “The intended interest rate spread over the Fed funds rate is not known.”

    From Greg Ip:


    “The Fed said today it would create a new “term auction facility” under which it would lend at least $40 billion and potentially far more, in four separate auctions starting this week. The loans would be at rates far below the rate charged on direct loans from the Fed to banks from its so-called “discount window.” ”

    This is a step in the right direction that has the potential to remove bias in the system towards large, connected banks.

    The question is who will be invited to these auctions, small, medium sized banks, and nonbanks?

    It sounds as though the word ‘inject’ is proper in this context as the Fed is using its power to force money into the economy’s circulation of ‘at least 40 billion’. This would be an ‘injection’ as it implies a set amount of asset purchases by the Fed at rates that may hit zero percent.

    It will be interesting to see how close to the zero bound this auction gets or even ‘worse’, if the Fed slams up against it.

  2. is it known what measures – other than the liquidity facility – policy makers consider to address contraction in supply of credit resulting from pro-cyclical features of Basel II, bank asset impairment and higher volatility.

  3. All the cb’s can do is ‘set price’ and not ‘quantity’
    If this is not familiar to you I suggest a quick read of ‘soft currency economics’ at http://www.mosler.org.

    briefly, one member bank’s credit is another’s debit regarding fed reserve accounts. net reserves stay unchanged by bank activities.

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