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Credit Markets and the Visible Hand: The Discount Window and the Macroeconomy
Conti-Brown, Peter Skeel, David
Conti-Brown, Peter
Skeel, David
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Abstract
In times of crisis such as the 2008 financial crisis and the 2020
COVID-19 pandemic central banks throughout the world engage in
interventions with lasting effects on financial markets and the
macroeconomy, for better and worse. The negative political consequences
of these interventions—fears of politicizing central banking and
inflationary concerns about dramatic interventions among them—can
dampen the enthusiasm for such interventions early in the face of crisis.
This dynamic creates a dilemma for the US central bank, the Federal
Reserve, causing it to eschew interventions beyond monetary policy until
the crisis has already crashed, at which point the Fed moves into every
aspect of policy throughout the economy. This Article highlights the
inadequacy of this dynamic. Sole reliance on monetary policy is
insufficient in the face of growing crisis, while the Fed's vast emergency
lending facilities face ever stiffer political, inflationary, and equity
concerns. The Article advocates instead for a new approach to
macroeconomic stability, not just through monetary policy or emergency
interventions, but through judicious use of the sleeping giant of Fed policy,
the bank-intermediated discount window. Focusing on the problematic
credit market for debtors-in-possession in the midst of bankruptcy, the
Article suggests a reformed system that safeguards the Fed, supports small
and medium-sized enterprises, and stabilizes the macroeconomy without
exposing the system to the pockets of instability that the Fed’s overreliance
on dramatic intervention can do.