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September/October 1992, 
Vol. 74, No. 5
Posted 1992-09-01

The Misuse of the Fed's Discount Window

by Anna J. Schwartz

Anna J. Schwartz, a senior research associate at the National Bureau of Economic Research, asks not only whether the Fed's discount window continues to serve any useful function, but also whether its operation may have unintended adverse effects. The discount rate, for example, draws widespread—but in Schwartz's view, misdirected—attention as an indicator of the thrust of monetary policy. Schwartz is also concerned about the many, albeit unsuccessful, attempts to extend the Fed’s lender-of-last-resort function to nonbank firms. Most important, however, is her concern that in recent years the discount window has extended credit to banks that were insolvent or near insolvency—a practice that she argues has increased taxpayer losses associated with reimbursing insured depositors at failed banks. Although many analysts will find some of her arguments controversial, Schwartz raises a number of issues worthy of further research.