The Federal Reserve had to be creative in following Walter Bagehot’s dictum for financial crises: “lend freely, at a high rate, on good collateral”. It is unlikely that Bagehot would have approved of this:
Federal Reserve Bank of New York announced today that it had published the rules it had been using with primary dealers in an effort to ensure greater transparency. Primary dealers, the groups through which the Federal Reserve funds are lent to banks, garnered attention after they, too, needed loans from the Fed to stop them from “dump[ing] assets on the market in fire sales” during the financial crisis. Lending directly to primary dealers, a move only permitted in “unusual and exigent circumstances” since lending to the highly-leveraged groups could encourage excessive risk taking.
The NY Fed emphasised that the new rules “do not represent new standards expected of primary dealers” but rather a “formalisation of the existing practice.”
The newly published rules include: Read more