The Daily Feather — A Five-Vodka Event
On Tuesday, March 18, 2008, Grep Ip reported for The Wall Street Journal that the Federal Reserve had opened the discount window to securities dealers. The action required a unanimous vote by the Fed’s five governors who invoked a Depression-era clause in the Federal Reserve Act to waive a prohibition on extending loans to nonbanks. “On Wall Street, there is likely to be some relief that the Fed has finally opened the discount window to securities dealers, something they have long clamored for. The Fed has been reluctant because the move was outside its explicit mandate. ‘This is a five-vodka event,’ said a senior executive at one big brokerage firm that previously didn't have access to this funding source. ‘Liquidity is no longer an issue.’ That lifeline did not come in time to salvage the wreckage that was Bear Stearns, which the prior Thursday evening, informed the SEC and Fed that a run on its cash reserves left it with no option other than filing for bankruptcy protection the next morning.
Though it’s always informative to look back at history and the charts we studied back then (upper left), I promise I’m not stuck in a time warp, fighting the last war. Rather, I share this slice of history to illustrate the signal emanating from increased usage of the Fed’s discount window, a phenomenon that’s been with us since the beginning of 2022. Of course, the credit part of the Great Financial Crisis (GFC) was just gaining a head of steam when Bear fell. That part does worry me.