For future reference, via WSJ:

Amid a growing clamor from battered traders and money managers, as well as some economists, for central banks to go beyond their massive liquidity injections of the past week, Fed Chairman Ben Bernanke continued to resist calls for an immediate interest-rate cut. But he showed some creativity and flexibility by altering the prices and policies surrounding the discount window.

Top Fed officials decided to lower the discount rate — the interest charged on direct Fed loans to banks — during an emergency hour-long video conference Thursday evening. To encourage banks to borrow from this source, the Fed lengthened the term of such loans to as long as 30 days from the usual one day.

Then, in a move reminiscent of the Fed’s crisis management during the 1998 market meltdown prompted by woes at the Long Term Capital Management hedge fund, a consortium of banks got together with Fed officials to discuss the central bank’s plans. At the request of the New York Fed, the Clearing House Payments Co. — a 154-year-old bank-owned group that operates much of the nation’s payment systems by clearing checks, wire transfers and other forms of payments — hosted a conference call at 10 a.m. Friday. Financial leaders such as as James Dimon of J.P. Morgan Chase & Co., Charles Prince of Citigroup Inc., Kenneth Lewis of Bank of America Corp., Lloyd Blankfein of Goldman Sachs Group Inc. talked with Fed officials who explained their crisis response and subtly sought some help in boosting the impact of their action…

The call was led by New York Fed president Tim Geithner and Fed vice-chairman Donald Kohn and they emphasized they would see discount window borrowing as a sign of strength. “The objective is to encourage a broad range of financial institutions to feel more comfortable providing term financing that will facilitate orderly functioning of funding and credit markets,” Mr. Geithner said, according to a participant. The steps, he said, will “help facilitate a collective response by financial institutions to these exceptional conditions.

Officials believe that getting banks to borrow from the discount window requires overcoming the reluctance of any individual banks to do so, for fear of showing weakness unless other banks borrow from it too. So, Fed officials said they would regard participation as a sign of strength, not weakness.

Bank executives said the moves would likely bring some confidence to markets, although they stopped short of saying they would follow the Fed’s guidance and tap funds from the discount window. That is particularly the case for banks that can borrow at more attractive rates elsewhere even in light of the reduced discount rate. Still, the Fed move does give banks access to cash they wouldn’t otherwise have, because the discount window will accept as collateral the mortgage-related securities that have been shunned by creditors amid the turmoil.

Lori Appelbaum, a bank analyst at Goldman, said access to the discount window could help specialty mortgage-finance companies such Countrywide Financial Corp. On Thursday, Countrywide drew down an $11.5 billion credit line to bolster its short-term finances. “This is not a panacea in any way, but I do think people will use the discount window in the coming days and weeks,” said an executive who was on the call.

This account suggests a less planned and more improvised approach to the situation than we have inferred from some of the circumstances. One would like to think that the Fed has a game plan to stay ahead of events. The costs to the economy could be high if the Fed insists on acting a little too timidly a little too late at each decision point.

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