The Federal Reserve, the Central Bank of the United States, has raised its discount rate by a quarter of a percentage point, to 0.75 percent from 0.50 percent, effective tomorrow Friday, February 19, 2010. The discount rate is the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility - the discount window. From the Federal Reserve's press release:

The Federal Reserve Board on Thursday announced that in light of continued improvement in financial market conditions it had unanimously approved several modifications to the terms of its discount window lending programs.

Like the closure of a number of extraordinary credit programs earlier this month, these changes are intended as a further normalization of the Federal Reserve's lending facilities. The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy, which remains about as it was at the January meeting of the Federal Open Market Committee (FOMC). At that meeting, the Committee left its target range for the federal funds rate at 0 to 1/4 percent and said it anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

The changes to the discount window facilities include Board approval of requests by the boards of directors of the 12 Federal Reserve Banks to increase the primary credit rate (generally referred to as the discount rate) from 1/2 percent to 3/4 percent. This action is effective on February 19.

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The Federal Reserve, the Central Bank of the United States, has raised its discount rate by a quarter of a percentage point, to 0.75 percent from 0.50 percent, effective tomorrow Friday, February 19, 2010. The discount rate is the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility - the discount window. From the Federal Reserve's press release:

The Federal Reserve Board on Thursday announced that in light of continued improvement in financial market conditions it had unanimously approved several modifications to the terms of its discount window lending programs.

Like the closure of a number of extraordinary credit programs earlier this month, these changes are intended as a further normalization of the Federal Reserve's lending facilities. The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy, which remains about as it was at the January meeting of the Federal Open Market Committee (FOMC). At that meeting, the Committee left its target range for the federal funds rate at 0 to 1/4 percent and said it anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

The changes to the discount window facilities include Board approval of requests by the boards of directors of the 12 Federal Reserve Banks to increase the primary credit rate (generally referred to as the discount rate) from 1/2 percent to 3/4 percent. This action is effective on February 19.

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Rarely has a Senate Banking committee hearing been so entertaining. I have listened to this clip now three times and in it I have a new found respect for Senator Jim Bunning of Kentucky. To call Chairman Bernanke the living definition of a moral hazard is long overdue. Some highlights:

Chairman Greenspan’s attitude toward regulating banks was much like his attitude toward consumer protection. Instead of close supervision of the biggest and most dangerous banks, he ignored the growing balance sheets and increasing risk. You did no better. In fact, under your watch every one of the major banks failed or would have failed if you did not bail them out.

Rather than making management, shareholders, and debt holders feel the consequences of their risk-taking, you bailed them out. In short, you are the definition of moral hazard.

Senator Bunning now joins Vermont Senator Bernie Sanders in trying to block Bernanke's reappointment by putting a "hold" on it when it reaches the Senate floor. Essentially that means the Senate would need 60 votes to approve the nomination, rather than a simple majority.

Let's just cut to the chase, as a regulator Chairman Bernanke has been a dismal failure.

The full comments of Senator Bunning are below the fold.

Update [2009-12-3 21:41:43 by Charles Lemos]: Senator Jim DeMint, Republican of South Carolina, has also placed a "hold" on the nomination of Federal Reserve Chairman Ben Bernanke. Unlike Senator Bunning and Sanders, however, Senator DeMint's hold is conditional upon an audit of the Fed. More at the The Hill.

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I have a new found respect for Senator Jim Bunning of Kentucky. To call Chairman Bernanke the living definition of a moral hazard is long overdue. Let's just cut to the chase, as a regulator Chairman Bernanke has been a dismal failure.

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When a hurricane passes over the land, spreading its surface with wrecks, they who survive its fury, though for a while stupified with terrour, soon recover their faculties, and set about to free the soil of the shivered fragments, and reconstruct their edifices in a mode better able to sustain the violence of future tempests. We are now in this condition. A hurricane has passed over our land, and the traces of its wrath are scattered around us. We have spent a sufficient time in the inactivity of dismay, and it is now proper to bestir ourselves, and make preparations for the future. It is particularly incumbent on those who are imbued with economick principles, and animated by a sincere desire to promote the lasting good of their country, to exert themselves in forming a correct publick opinion as to the course to be pursued. We lay claim to the latter of these qualifications, and obey its promptings to urge upon our readers that plan which we think alone has the recommendation of perfect accordance with the principles of democracy, and which alone promises, as its result, "the greatest good of the greatest number."

Our plan may be stated in a phrase of the utmost brevity; for it consists merely in the absolute separation of government from the banking and credit system. Bank and state have been hitherto joined in an unholy union, and we see the fruits of the connexion. Let us now try if we cannot divorce the ill assorted pair, and by so doing promote the prosperity of both, and of all dependant upon them. - William Leggett

The above is from an essay entitled Separation of Bank and State written by William Leggett, one of the most prolific political essayists of the Jacksonian era. A defender of classical laissez-faire economic liberalism, Leggett wrote for a number of New York newspapers and journals. This particular essay, which today we might term an editorial, was published in the [New York] Plaindealer on May 23, 1837 just two months into the Presidency of Martin Van Buren. I bring up the date because two weeks prior on May 10, 1837, the second of the great economic downturns of the nineteenth century, the Panic of 1837, began in earnest when every New York bank stopped payment in specie (gold or silver coin). In truth, the Panic had been building for quite some time. During the first three weeks of April two hundred and fifty businesses and trading houses failed in New York City alone. The Panic of 1837 is extraordinary by any measure but for purposes of brevity let me cite one fact: out of eight hundred and fifty banks then operating in the United States, three hundred and forty-three closed entirely, sixty-two failed partially, and the system of State-chartered banks received a shock from which they never fully recovered.

Today those who advocate laissez-faire economic policies tend to be associated with the conservative right, but Leggett in his own day occupied a position on the left of the political spectrum. Though hired to review plays, Leggett would become the intellectual leader of the nation's first militant workingmen’s movement. His fiery prose reflects an egalitarian spirit - he would describe himself as a Jeffersonian - and he is one of the first essayists to look at political economy and reflect on the proper role of government in the American economy while writing for a mass audience. In his initial response to the Panic, Leggett declared, "Let the banks perish! Let the monopolists be swept from the board! Let the whole brood of privileged money-changers give place to the hardy offsprings of commercial freedom, who ask for no protection but equal laws, and no exemption from the shocks of boundless competition." Clearly, Leggett would not have been a fan of the Troubled Asset Relief Program.

Leggett, perhaps, was at his dramatic best when he described bankers as pirates and the manner in which he laid bare the all too cozy relationship between capital and government writing that "[T]hese bankers now stand before the world, by their own confession, as a crew of swindling pirates, who have been preying on the property of the community. They threw open their vaults, where they led the publick to believe that they had abundant resources of hidden treasure, and lo, not an ounce of silver or gold is there! . . . [T]heir promises now, instead of representing silver and gold, represent nothing but violated faith, and the folly of publick credulity in the honesty of soulless corporations which derive their very being from legislative corruption."

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