Tuesday, December 11, 2007
Very peculiar. The discount window, in its current incarnation, is little more than tinsel on a Christmas tree: an ornament that serves relatively little practical purpose. So adjustments to the rate are relatively symbolic on the one hand, and carry few macroeconomic consequences on the other.
So the Bernanke Fed, faced with a stunning degree of illiquidity in short term money markets, decides to disappoint markets on a rate that carries relatively little macroeconomic risk but could provide a useful balm to confidence in the banking system.
If they were worried about moral hazard, why not do zero on Fed funds, but take the discount rate down 75? It wouldn't be hard to argue that that would be a more appropriate solution to the current situation than 25 on funds and a half-arsed 25 on the discount rate.
Is Macro Man alone in feeling that if Bernanke were a football manager, the hometown supporters would be singing "you don't know what you're doing" right about now?