Re: Fed open market operations, reply-comment on Mossler

["J. Barkley Rosser, Jr." <rosserjb@xxxxxxx>]

Warren,
     I think the stigma against window borrowing is of
more recent vintage, notably the wave of bank failures
at the end of the 198s and early 1990s.  Prior to that it
was not nearly so big a deal, although "excessive"
window borrowing was always a signal of "trouble," and
hence to be avoided.  Again, there are certain banks in
certain sectors, e.g. agriculture, that regularly borrow
significant amounts from the window without stigma,
this reflecting older patterns.
Barkley Rosser
-----Original Message-----
From: Warren Mosler <mosler@xxxxxxxx>
To: POST-KEYNESIAN THOUGHT <pkt@xxxxxxxxxxxxxxxx>
Date: Saturday, February 26, 2000 11:40 AM
Subject: Re: Fed open market operations, reply-comment on Mossler


>
>
>Christopher Niggle wrote:
>
>> Warren, other interested parties:
>>
>> Although most NY Fed operations are "defensive" and compensate or offset
>> Treasury operations, not all are: when the Fed is changing the ff rate
>> (say, tightening) it is actively changing the rate.  And it then must
>> deliberately oppose private sector activities in order to maintain that
>> higher rate.
>
>Chris,
>
>Currently, in the US, the Fed limits it open market 'adds' such that
>the banks must borrow a few $ at the discount window to meet their
>reserve requirements.  Because there is a 'stigma' for banks that
>borrow from the window, banks would rather buy funds from each
>other than from the Fed.  By keeping the banking system net short
>(by the bank's calculations) they begin bidding for fed funds from
>each other at higher and higher spreads over the discount rate until
>some banks decide to borrow at the window at the lower rate rather
>than pay the higher rate from another bank.  It ususally works out
>that a given net short position results in a given spread of fed funds
>over the discount rate.  So, for example, a discount rate of 5.5% and
>$200 million of borrowings at the window might correspond to a 5.75%
>fed funds rate.  If the DC Fed decides to raise the funds rate to, say,
>6% it can simply raise the discount rate to 5.75% which, with the
>same net borrowed position of $200 million, result in a 6% fed funds
>rate.  Often, however, for political reasons, the DC Fed may leave the
>discount rate at 5.5%.  In that case, the NY Fed, to meet the new target
>of 6%, will increase the banks need to borrow from the window (by
>supplying less non borrowed reserves through its open market operations)
>until the funds rate stabilizes around 6%.  This will then be seen to
>correspond to a higher net borrowed position, perhaps $350 million.
>The process is the same.  Banks borrow from each other but now that
>$350 must be borrowed from the window it takes the wider spreads
>off of the discount rates to induce more banks to decide to borrow
>at the window.  (Note that the mix between borrowed and non borrowed
>changes, but the total remains the same.)
>
>By the way, IMHO, this is a very silly way to run a clearing system.
>It is a holdover from the gold standard, at best.
>Other countries simply have no stigma attached to borrowing at the
>window and change the fed funds rate by changing the discount rate.
>
>This process if outlined in more detail in 'Soft Currency Economics'
>also on http://www.warrenmosler.com
>
>> Chris
>
>w
>
>