WHAT WOULD BAGEHOT DO?–REVISITED.

WHAT 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 event of a financial crisis (think of a spike in the demand for cash). Over a year later, Bagehot’s analysis still applies. Any of the remedies which involve the federal government buying “bad” credit instruments can be traced back to Bagehot. It is said that a great many of these assets will pay out in the long run, but they are completely illiquid—they cannot be turned into cash now. The thought is that the government is able to sort out these instruments and wait for them to be repaid.