Credit Markets and the Visible Hand: The Discount Window and the Macroeconomy

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 ofbankruptcy, 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.