Today the Fed announced that it would act directly on the credit markets by purchasing short term commercial paper (90 days in maturity) from qualifying businesses and banks. This will no doubt be met with outrage by many who believe that the Fed is abandoning its traditional role (which is apparently lagging the business cycle and screwing up the economy) for something new. Actually those who know the history of the Fed also know that this is in fact the exact role the Fed was created to play in the economy--provide liquidity in the financial markets by discounting short term commercial loans (then known as "bills") to supply needed liquidity. The mechanism is slightly different due to structural changes in the economy, but the purpose is exactly the same.
The Fed became involved in the government securities market for the sole purpose of financing (through the banking system) WWII. Prior to that time, the notion that the Fed would buy government securities or loans backed by government securities was considered anathema and the quickest way to an inflationary bubble.
Could this be the return of the discount rate?
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