Federal Reserve operations and monetary policy

¶ … Federal Reserve system adequate in strengthening the payments system?

After the credit crisis of 2008, the Federal Reserve vowed to assume a permanent role in issuing routine short-term loans to banks. When Lehman Brothers was not 'bailed out' there was a 'run' on most of the major banks, which caused many banks to default on what were once entirely routine, secure short-term loans. The Fed, in a December 2008 press release, declared that it would take a more proactive official position in providing short-term loans to otherwise solvent banks to avoid sudden bank runs and subsequent liquidity crises. The Fed will now offer intraday balances through collateralized daylight overdrafts.

The Fed will pledge collateralized 'daylight' overdrafts at no fee and increase fees for uncollateralized daylight overdrafts to the annual rate. By adjusting net debit caps, eliminating the current deductible for daylight overdraft fees, and increasing the penalty daylight overdraft fee, the Fed hopes to restore confidence in the American banking system. Collateralized loans will have demonstrably greater security than uncollateralized loans.

While these measures seem sound and will hopefully ensure that no institution will be penalized for making the types of loans that are necessary for the international economy to remain functional, much still needs to be done in exercising oversight over the practices that lead to the failure of Lehman Brothers in the first place. A lack of transparency in financial dealings remains a concern, and there are still a variety of financial instruments that are poorly regulated -- moreover, the precipitous drop in interest rates orchestrated by the Fed to stimulate the economy could give rise to yet another crisis of over-borrowing and widespread consumer debt. Greater regulation and oversight is necessary as well as greater insurance of debt.