reintermediation in the financial sector, and to encourage the reopening of the federal reserve makes loans at the discount window against a wide range of collateral, but under most circumstances this facility is lightly used. private markets for securitization products so that price discovery could proceed and credit flows resume. those actions raise a number of difficult public policy questions for central banks and other public authorities. an important issue is how durable the changes should be ; to what extent are they a desirable adaptation of central bank tools to the current structure of markets, and to what extent should the changes be phased out as market functions are restored? i start from the premise that central banks should not allocate credit or be market makers on a permanent basis. that should be left to the market – or if externalities or other market failures are important, to other governmental programs. the federal reserve should return to adjusting reserves mainly through purchases and sales of the safest and most liquid assets as soon as that would be consistent with stable, well - functioning markets. in fact, several of the federal reserve's new programs are designed to be self - liquidating as markets improve. minimum bid rates and collateral requirements have been set to be effective when markets are disrupted but to make participation uneconomic when markets are functioning well. under current law, our facilities for investment banks that don't involve securities eligible for open market operations ( omo - eligible paper ) will necessarily be wound down when circumstances are no longer " unusual and exigent " ; i'll come back to questions about these facilities in a minute. however, the federal reserve's auction facilities have been an important innovation that we should not lose. they have been successful at reducing the stigma that can impede borrowing at the discount window in a crisis environment and might be very useful in dealing with future episodes of illiquidity in money markets. the new auction facilities required planning and changes in existing systems, and we should consider retaining the new facilities for the purposes of bank discount window borrowing and securities lending against omo - eligible paper, either on a standby basis or operating at a very low level when markets are functioning well in order to keep the new facilities in good working order. the latter might require that we allow the auction to set the price without a constraining minimum, but a small auction should not distort the allocation decisions of private participants. our experience in recent months has underlined the global interdependencies

donald l kohn : money markets and financial stability speech by mr donald l kohn, vice chairman of the board of governors of the us federal reserve system, at the federal reserve bank of new york and columbia business school conference on the role of money markets, new york, 29 may 2008. * * * market participants, scholars, and central bankers and other policymakers have long recognized that liquid money markets are critical to financial stability. many banks and other financial market participants obtain a significant portion of their funding in the money markets and rely on rolling over such short - term debt. developments in global financial markets since last summer have underscored that if market participants become concerned about their access to money market funding, they can pull back from providing credit to other financial market participants and to businesses and households. furthermore, certain liquidity tools traditionally used by central banks may not be fully effective in restoring liquidity to the money markets and containing the threats such money market disturbances pose to financial stability. we all need to reflect carefully on these developments and draw appropriate lessons regarding the management of liquidity risk and the design of central bank liquidity facilities. 1 the role of money markets in the recent and ongoing financial market turmoil the financial turmoil that we have been experiencing since last summer clearly did not originate in the money markets. as everyone knows, the trigger was losses associated with soaring delinquencies on u. s. subprime mortgages that were originated from 2005 through early 2007, a period during which underwriting standards for such mortgages weakened dramatically. but the loosening of standards and terms on subprime mortgages was also symptomatic of a broader erosion of the underwriting of loans to households and businesses. many of those loans had been packaged as asset - backed securities and sold to investors who relied on the credit ratings of the securities rather than thoroughly conducting their own due diligence on the securities'risk characteristics. when those investors experienced significant losses on even the most highly rated securities backed by subprime collateral, they lost confidence in the ratings and pulled back from markets for a range of asset - backed securities, especially those with more complex structures. during the spring and early summer of 2007, the pullback by investors began to put pressure on the liquidity of banks and other financial institutions that had originated large volumes of loans with the expectation of distributing them. that pressure became severe and widespread when the liquidity of the asset - backed commercial paper ( abcp ) markets became impaired in