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That's a feature, not a bug. As the system works today, the central bank (or the Treasury, but that comes to the same thing) ends up footing the bill for bad lending in any event. Might as well put them in the loop.

On the other hand, if the central bank imposes a 10 % haircut for the bank on top of the 20 % margin it forces on the borrower, it can probably make do with rules of thumb for most asset classes. Few houses are 28 % below their official valuation even in a deep crisis. They might drop 28 % below the bubble value, but the CB would only be on the hook for 72 % of the official value. The rest would be margin - something that would, in itself, discourage bubbles.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri May 13th, 2011 at 04:30:08 AM EST
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Also, if an untrained intern has difficulty understanding the asset, it shouldn't qualify as collateral at the discount window.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Fri May 13th, 2011 at 04:36:56 AM EST
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