Credit Crunch

The Fed has decreased their discount rate. I am not sure that pumping in more liquidity will solve the problem. Giving an alcoholic a bottle of wine will get rid of the DTs, but it does not deal with the underlying problems.

I am also puzzled why the Fed is accepting mortgage-backed securities. Does that mean that the banks do not have any better quality securities that they can give to the Fed? Or is the Fed taking over some of the risk with subprime mortgaged-backed securities?

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If you are a subprime borrower and have bought an overvalued house with a small deposit and an ARM, and things go wrong, the bank will sell your house and you will lose everthing.

If you are a bank and you buy overvalued highly-leveraged securities with short-term commercial paper, and things go wrong, the Fed will come to the rescue.
That is government by the people, for the people.