The discount window is the means to borrow directly from the Federal Reserve Bank if you're a member bank. Banks use the window when they can't borrow enough to top up needed reserves in the open market.

Do it once, and it's OK, especially during odd times in the market, such as end of quarter and holiday times. The Fed will be OK with it.

Do it a second time or more and the Fed gets a little worried. It puts in a call to the bank. If the answers aren't what the Fed wants to hear, then the Fed sends a team out to pay a visit to the bank to look at the books.

Banks try to avoid this. Trust me, I know from direct experience. The window isn't something good banks use with regularity.

But in 2003, the Fed made some additional changes. It made the rate of interest flexible at the window depending on the bank's credit status.

A good solid bank receives the advertised discount rate. Those with less-than-stellar credit get marked up on their borrowing costs. And if a bank has a special situation--such as an odd market or a rural area—it gets an undisclosed special rate.

But in all cases, borrowing from the Fed isn't a primary source of reserves.

The move basically only helps the really troubled banks, which are in such trouble now that a 50-basis-point decrease is meaningless. They'd pay full credit card rates just to get their hands on some cash right now.

Nevertheless, the markets are trying to pitch this as a good move. As we saw in the opening Friday after the Fed's announcement, many folks got on board and bought stuff without really looking at how this might play out in terms of real credit easing in the market.

If the Fed wanted to fix the current market troubles, it would ease up on margin and reserve value rates for bonds--especially mortgage bonds--held by banks and financial institutions. This would play out well for the financial industry and companies in many varied industries. But the Fed hasn't done this.

And it could change the allowable bonds and securities that can be posted to trade with the Fed during its open market operations. But it hasn't.

Note current Chief Ben Bernanke did his school work on the monetary policy of the Great Depression. My editor suggested that perhaps he wants to get us back in similar conditions so that he could then know what to do.

In defense of the Fed chief, we do need to have the market appreciate risk again. For too long, risk wasn’t factored into decision-making in the credit markets. The same was the case in the late 1990s; risk didn't come into play until the end of the stock market boom.

The key to learn now--just like we learned in 2000--is that it's not the time for the Fed to step in when the crisis hits. But it needs to make sure that the rules of the road are in place before we get to a crisis.

In the ’90s, the Fed could have slowed down wild speculation and stock buying by simply changing margin rates for stocks, as well as reserve requirements on securities portfolios of banks and other financials. That would have raised the cost of capital in the stock market and at least touched the brakes along the way.

Of course, such requirements wouldn't have been met by the titans of Wall Street, which always work on the concept of making as much as they can for as long as they can.

The same mistake was made for years in the mortgage sector and other parts of the credit market. The Fed and other central banks didn't set the rules of the financial roads correctly to avoid the massive pileup we now have on our hands.

They could have tightened up on reserve rates on bonds in bank's capital structures as well as those held for sale. This would have slowed credit growth and caused more rational discussions of asset and liability committees of banks and financial companies. But instead, the Fed went along with business as usual and did nothing.

And it went further to ease money for mortgages and other collateralized debt obligations (CDOs) by moving on Basel II banking credit standards that reduce reserve rates on these kinds of securities and assets.

So, we got what we deserve. But again, it’s business as usual.

I read an interesting bit in the Financial Times (http://www.ft.com) in which the commentator said that rich folks like socialism for them--easy money, support and bailouts. But for the poor, they like capitalism, including foreclosure and limited bankruptcy rights. And I'm beginning to see why.

Commercial Paper Hangers

The credit market isn't just about mortgages but short-term financing for companies and financials in the market, called commercial paper. These are overnight to short-term loans that are no more than IOUs from companies to pay them back. They can be done directly and/or traded.

It's been cheaper and easier for too many companies to use this part of the market, which gives companies and investors the ability to work out good deals on interest as long as nothing breaks.

It's broken now.

Companies around the world now aren't able to get loans, furthering the crisis. And although we have it bad in the US, in Europe and Asia, companies are now facing similar cutoffs from their formally dependable credit source.

In Canada, it stopped this week. This meant that companies from income business trusts to banks and everything in between got cut off.

But in an unusual move, the Ministry of Finance—yes, those nice smart folks who changed the tax code on trusts--brokered a deal. Investors or lenders in the nation's commercial paper market would convert the loans from overnight and short term to longer term, shifting commercial paper into three- to five-year subordinated notes.

This saved the Canadian financial markets Thursday. But it doesn't solve the short-term funding needs.

I'm thinking now would be a good time for a tax cut in Ottawa.

Closed-End Fund Realities

We've been seeing some real carnage in some of the prices of our favorite closed-end bond funds in the past few weeks. Because closed-end funds trade as stocks, the value of the stock will rise and fall with the market. That won't always correspond with the value of the underlying assets.

Think back to banks. Their shares rise and fall in the market and can be measured in terms of the price of the stock against the net value of a bank’s book of assets. Banks trade above their book but rarely below their book.

Bond funds do the same. From time to time, the funds’ stock value will rise in the market to be more valuable than the liquidation of the underlying net book of assets. Although we don’t usually refer to a bank stock as trading at a premium to book, we do when it comes to funds.

But although most solid banks don’t often trade at discounts to their net book value, bond funds can and often do. Almost every single one of our bond funds falls into this category. This means that the funds are worth a lot more in reality than what the stock market is valuing them at.

The markets right now are in a tizzy over credit issues. It doesn’t matter whether a company has a sterling balance sheet, coupled with solid revenues and lots of profits. Folks are panicked and seemingly selling just about anything that’s deemed to have any relation with the credit markets.

But not all bonds are being sold. Investors are purchasing Treasuries and US government, as well as municipal bonds, as a haven. The same can be said of government bonds outside the US around the world.

Many of you are also beginning to panic. You own bonds for the stability of heavy cash flows, and the premise of solid and sustainable asset values. So when our funds start to look like subprime, near-bankrupt mortgage companies, no wonder the bile starts to rise.

But we need to know how two things will play out for our closed-end bond funds.

First, we need to look at the dividend flows from the underlying bond interest and coupons. None of our funds are in any real jeopardy over their dividend flows. In fact, with the bump up in some yields in parts of the corporate, mortgage and agency markets, we’ll see management buying and locking in even better yields for the coming years.

And as funding costs rose higher in the past couple years with tighter money, the liability side of the closed-end funds was getting pricier. Now that central banks around the world are easing up, our fund companies—as very high-quality borrowers--will get much better terms, deals and interest rates. This will give us a lower cost of funding and again build up distributable cash flows for higher dividends.

Second, we need to look at the real value of each of our funds. This means that, although the stock prices are now at big discounts and recent stock price performances have been terrible, the underlying bonds and other net assets have been either holding up or performing well during the past weeks.

If they weren’t, we’d be giving you sell recommendations.

Weather Wonders

Nobody likes bad storms. Financials and insurance companies cringe when the Weather Channel (http://www.weather.com) goes into hurricane-watch mode. But some companies get wound up on the positive side of the market.

Think about the Gulf of Mexico and the local offshore gas and oil businesses that get exposed. These guys aren't on the upside of the market; but they set up their peers that are onshore and will get the nod when their Gulf brethren get whacked.

This is where contract drillers with assets well onshore and away from the gulf come in. On Friday, I rolled out a favorite play of mine in this industry inside Inner Circle (http://www.neilsinnercircle.com).

And inside Personal Finance (http://www.pfnewsletter.com), we have our partnerships, which hold assets in Appalachia and beyond that are still cheap given the stock market's woes of late. These-- including one of my Pittsburgh-based favorites--will really cash in.

We'll see how these play out next week as Hurricane Dean swirls around.

Dead Guys

Merv Griffin knew how to play out his strengths all the way. Many folks may only vaguely recall his old talk show when he really set the stage for modern shows, ranging from late-night chat formats to daytime television. And many of the mega-stars of the small screen--from Jerry Seinfeld and beyond--owe much to their appearances on Griffin's show.

But did you know that Griffin was an accomplished musician and composer? Many of the iconic tunes, including the theme to Jeopardy, were composed by him. Also included is Wheel of Fortune .

Griffin then moved onto one-on-one live game shows, becoming a kingpin of gaming. He led Las Vegas to its current hyper state of development--all by the mere age of 82.

Phil Rizzuto was another man who played it out completely; he died at 89 years. Phil was a shortstop for the Yankees for 13 seasons.

That's something in its own right, but his real talent was played out well above the field in the press box. It was here that he knew how to really entertain and inform baseball fans and foes of the fellows in pinstripes.

And last but not least is Joe O’Donnell, who died at 85 years. Despite distinguished service in the Marine Corps during World War II and then serving as a photographer to five White House administrations, O'Donnell's most famous snapshot would come with a subject of a small boy standing on a curb. That small boy was John Kennedy Jr, whom Joe captured saluting his father's casket during a funeral procession back in 1963.

Speaking Engagements

If you’d like to hear firsthand about some of our investments, particularly those in some of the more-interesting markets beyond the usual Wall Street fluff, join me on one or more of my upcoming conferences or travel opportunities--see below for the various opportunities available.

Head out to the East Coast, and join me and PF Associate Editors Roger Conrad and Elliott Gue at the Washington, DC, Money Show, Sept. 6-8, 2007. The conference will take place at the Wardman Park Marriott, located in downtown Washington DC. Click here to register for free. Be sure to tell them I sent you.

Noble palaces, historic villages, stunning natural vistas and indispensable, one-on-one conversation: I’ll be cruising down the blue Danube Sept. 8-16, 2007, along with PF Associate Editors Roger Conrad and Elliott Gue. You’ll have unfettered access to talk about your portfolio or any other topic that comes up as you take in Central Europe’s rich culture and historic beauty aboard the River Cloud, a “five-star floating hotel.” Interested in exploring Europe and your portfolio? Contact Joseph H. Conlin Travel Management toll free at 877-814-6502 or via e-mail at nycimpresario@mac.com to finalize your plans.

I’ll also be appearing at the following events:

• The Investment Advisors Conference, Chicago, Oct. 8-12, 2007
• American Association of Individual Investors, Los Angeles, Oct. 13, 2007
• Lakeway Men’s Breakfast Club, Austin, Texas, Oct. 17, 2007
• New York Wealth Expo, Oct. 19-21, 2007
• International Living Ultimate Event, Panama City, Panama, Oct. 24-25, 2007
• San Francisco Hard Assets Conference, Nov. 18-19, 2007
• London Money Show, Nov. 30-Dec. 1, 2007

If you’re interested in having me or one of my cohorts address any investment or professional groups, please e-mail me at bygeorge@kci-com.com with ideas or suggestions.

Errors/Omissions: I always welcome being called on facts, figures and commentary from readers and look forward to your feedback. I can be reached by e-mail at bygeorge@kci-com.com.