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Posted by warren mosler (65.113.90.26) on 11:43:19 11/30/07
COMMENTS ON Q AND A
: * 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.
AGREED.
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.
PERHAPS TRUE, BUT NOT A 'BAD' THING WHERE THE FED WOULD BE 'BROKER OF
LAST RESORT.'
THE QUESTION IS, WHAT IS THE FURTHER PURPOSE OF NOT DOING IT THAT WAY?
WHAT IS GAINED BY BANKS SETTLING CLEARING RESIDUALS WITH EACH OTHER
RATHER THAN WITH THE FED?
NET LENDING FROM THE FED WOULD BE UNCHANGED, AS BANKS STRIVE TO
MINIMIZE RESERVE BALANCES IN EITHER CASE.
REAL RESOURCES WOULD BE SAVED, AS BANKS WOULD NOT NEED TO SPEND THE
TIME AND EFFORT TRYING TO TRADE WITH EACH OTHER.
THE NY FED WOULD HAVE FULL CONTROL OVER THE FED FUNDS RATE AS IT COULD
KEEP THE SYSTEM MODESTLY 'NET BORROWED' WITH OPEN MARKET OPERATIONS AS
IT DID PRE 2003.
THE ONLY POSSIBLE VALUE OF THE CURRENT ARRANGEMENT WOULD BE IF IT
EMPLOYED MARKET FORCES AS A DISCIPLINE ON BANK FUNDING. BUT IT
DOESN'T, SO THERE IS NO ADVANTAGE FOR THE CURRENT SET UP THAT I CAN
SEE.
:
: 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.
POINT? WHY SHOULD MONEY CENTER BANKS HAVE ACCESS TO CHEAPER FUNDS
THAN REGIONAL MEMBER BANKS? ALL CARRY THE SAME DEPOSIT INSURANCE, AND
SMALLER BANKS HAVE HIGHER PERCENTAGES OF INSURED DEPOSITS.
DOESN'T THE FED DESIRE THE FED FUNDS RATE TO BE THE UNIVERSAL COST OF
BANK FUNDS? IF NOT, THAT CAN BE ADDRESSED IN OTHER WAYS.
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.
NO, THE NY FED WOULD INSTEAD FIND ITS JOB FAR EASIER. JUST KEEP BANKS
NET BORROWED IN ANY QUANTITY. AND IF THEY OVER DO IT WITH EXCESSIVE
LIQUIDITY DRAINS IT WILL ONLY SHOW UP AS INCREASED WINDOW BORROWINGS,
NOT AS A DEVIATION OF THE FED FUNDS RATE
FROM THE TARGET RATE.
: 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.
I SEE A REDUCTION IN COSTS AND A REDUCTION IN THE DIFFICULTIES
SURROUNDING CURRENT POLICY.
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