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Another advantage of relying extensively on the discount window is that the central bank does not have to send out margin calls until the assets posted as collateral have fallen below the value of the reserves lent against it. Delaying margin calls against impaired by not yet underwater assets serves to dampen systemic margin calls

Conversely, the central bank should not permit the value of an asset as discount window collateral to increase after it is issued. Locking the value of an asset as collateral once it is issued means that even if the central bank takes leave of its senses and allows assets to be posted as collateral at bubble-inflated values it will only apply to new assets originated during the bubble. (And, of course, if one wants to avoid having to mark collateral to market on the way down, one must also avoid marking it to market on the way up.)

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Jan 11th, 2011 at 05:12:57 PM EST

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