Comments (8)

• fpk

• Sorry, but doesn't that refute the business-cycle theory. I mean here most of the time interest rates go up before a recession. Not down as one would expect from the theory.
  Or am I missing something?

• Published: February 27, 2008 7:28 PM

• jeffrey

• yes, you are missing something. the point here is that the Fed has discontinued this data as it says at the top of the chart.

• Published: February 27, 2008 8:07 PM

• marxbites

• Nope. The lowering of rates induces booms under which the Fed then the raises rates which tighten the money supply and creates the bust.

  It's the tightening (contraction of supply) after the loosening (expansion of supply) that brings the recession, just as Austrians have posited for almost 100 years now.

  They whipsaw the economy with backward looking data that is crap aggregates anyway and more often wrong than right.

  The free supply & demand market should set the rates and not greedy banker insiders who profit off the losses of the herd who always buys high and sells low for the most part.

• Published: February 27, 2008 8:26 PM

• JFP

• Now Bernanke (in testimony to Congress) is giving signs that the Fed will cut short-term rates AGAIN! It makes me think of the late Rev. Jim Jones exhorting his followers to drink the Kool-Aid ("Let's get gone! Let's get gone! Let's get gone!"). Might the economic problems to come in the next few years as a result of this massive injection of high-powered money (resulting in stagflation and the obliteration of the value of the dollar versus other currencies) be the graveyard of Monetarism (the same way that the inflationary crisis of the '70s seriously damaged the existing Keynesian hegemony in economics)? Do any of you think that the Austrian School will be in a position to capitalize on this? Or, will some rehashed version of the Keynesian/Interventionist school come to dominance (cheered along, no doubt, by the populist rantings of the current crop of politicians)?

• Published: February 27, 2008 9:45 PM

• jp

• This post is a bit misguided. The discount rate didn't just disappear, it became the primary credit rate in 2003. The link for the new data is here:

  http://research.stlouisfed.org/fred2/series/DPCREDIT?cid=118

  The discount rate was historically set 25 to 50 points below the target for the fed funds rate. In 2003 they changed this rate to sit 25-75 (or so) points above the target for the fed funds rate, and gave it a new name, the primary credit rate.

  Sorry folks, no conspiracy here. Just a policy change.

• Published: February 28, 2008 12:11 AM

• corrigan

• Absolutely.

  The point was that no-one would use the discount window for fear of attracting unwonted attention to their lack of liquidity - even though the discount rate was laughably set BELOW - the funds rate (in order to help Fed-promoter Paul Warburg make money in the Banker's Acceptance business).

  As part of the moves to deal with the seemingly imminent deflation in 2003 (about as real as global warming, in retrospect!), a switch to the European style 'Lombard rate' system was effected, under which - with no supposed stigma - banks short of ready funds could borrow freely at one of two modest premia to the existing funds rate.

  And, yes, in the classic model, especially short-term interest rates are supposed to go up into the crisis as a sign that the effective (real) supply of credit is becoming more restricted. However, you have to bear in mind the different institutional circumstances under which this was worked out - gold standard, small government, limited intervention, etc, etc.

  Even so, if you look at the prices of a whole range of non-government bonds (and their spreads over Treasuries) and consider that even these are largely academic levels, as financing has, in fact, all but dried up for many areas of speculative - and, increasingly, for more everyday - forms of activity, I think we can say that selective credit restriction is a harsh fact of life today.

• Published: February 28, 2008 2:11 AM

• Mark Thornton

• Yes, I aware it was replaced or renamed, but why was no one told? Why is it still referred to in the press as the discount rate?

• Published: February 28, 2008 6:42 AM

• Ball

• I find it amusing that the repo rate is now called the "primary credit rate".

  The discount window used to be the LAST place any bank wanted to borrow from. At 3 1/2% with the ability to use garbage for collateral, this is no longer the case. There can't be any pretense of restraint any longer.

  Meanwhile, keep an eye on non-borrowed assets (the hole they're trying to fill):

  http://www.federalreserve.gov/releases/h3/Current/

• Published: February 28, 2008 2:19 PM