Under more normal financial conditions, the willingness of banks to engage in the simple arbitrage noted above will tend to limit the gap between the federal-funds rate and the rate the Fed pays on reserves.

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It has long been against the rules for banks to engage in arbitrage by borrowing at the discount rate and lending in the Fed Funds market at a higher rate.

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There are many reasons why households might extract equity from their homes: to finance household expenditures, to make major home repairs or improvements (so-called residential investment), to consolidate more costly debt, such as credit card debt, to invest in personal businesses or other forms of entrepreneurship, to help finance the purchase of other real estate, or to engage in a form of investment arbitrage, or a mixture of the above.

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