WHAT WOULD BAGEHOT DO? What should the Federal Reserve do in response to the current financial crisis? It is appropriate to link to an article in The Economist to answer the question because Walter Bagehot, the greatest editor of the Economist, gave the answer in 1866. His policy prescription is still accepted. The central bank (the Federal Reserve) should act as a lender of last resort. It should lend “quickly, freely and readily” at a penalty rate of interest….. That is the guideline for what the European and American central banks are doing. The “penalty rate of interest” presents problems of application. The underlying idea is that the central bank does not want to bail out the reckless, which would encourage recklessness in the future.
[...] to sum up, Bernanke is using an old idea, and you agree that it’s the right move?” I had posted last August that Walter Bagehot should be the guide in a liquidity crisis: the Federal Reserve Bank [...]
[...] WOULD BAGEHOT DO?—REVISITED. Kids, in August of last year, I posted on Walter Bagehot’s policy recommendation from 1873 that a central bank should lend freely in the [...]
[...] good collateral at a rate above the market rate prevailing during peacetime”. When I first posted on Bagehot, I had some trouble finding a link to Bagehot’s recommendation on Google. Now, I [...]
[...] KEYNES DO? Kids, in times of financial crisis, we find ourselves turning to Bagehot and Keynes. In August of 2007 and again in March of this year, I posted on Walter Bagehot’s prescription that in a [...]
[...] WOULD BAGEHOT SAY ABOUT TOXIC ASSETS? I have posted before here and here on what Walter Bagehot had to say over a hundred years ago about the current financial [...]