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Posted by Ed Rombach (198.80.153.5) on 10:09:14 11/30/07
* QUESTION: Kathleen Stephansen from Credit Suisse.
Just thank you very much for this very interesting speech. Just aquestion: You alluded to the discount rate and the stigma that it stillcarries. Would you think that if there was no spread between the discount rate and the Fed funds rate, whether that stigma would disappear?
MR. KOHN: I think if there were no spread, the economic incentives might overcome the stigma. I'm not sure that the stigma would entirely disappear. But I think part of what we're seeing -- if I can sort of reframe your question -- about the lack of use of the discount window is partly economic and partly non-economic or partly about the 50 basis points, but partly about the stigma. And obviously, if we take the 50 basis points away and you can simply borrow at the federal funds rate, in effect I think the funding market would come all into the Federal Reserve. I mean, everyone would be borrowing a lot, including people who don't -- it's a very -- it would be a very difficult thing to do.
There are people who don't borrow at the federal funds rate, right -- smaller, medium-sized banks. And if they saw this window, they would come in and borrow -- basically, we would be giving them funds at a subsidized rate that people don't ordinarily have access at the funds rate. And we would be creating, I think, problems for the open markets, because they would have to anticipate how many reserves are going to be supplied through the discount window, which would be very hard to anticipate, and then drain those through open-market operations.
That's not to say that circumstances might not dictate at some point that we do something more with that penalty. I don't want to take that off the table. I think it's fair to say -- as I kind of hinted at in my little section on liquidity -- that we're looking at lots of different options about how to supply liquidity to the market. But I think we need to recognize that the one you came up with has some costs and some difficulties associated with it.
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