WALTER BAGEHOT’S ADVICE TO CENTRAL BANKERS FROM 1873. Before the Lehman bankruptcy there was a bailout of another investment bank, Bear Stearns. On March 17, 2008, six months before the Lehman bankruptcy, I posted here about Walter Bagehot’s advice to central bankers in 1873. I quoted Meyer Burstein: “Bagehot showed a fine appreciation of what has come to be the accepted doctrine of central bank behavior during a domestic crisis of liquidity: namely to stand ready to purchase broad ranges of securities, damping cumulative speculative forces feeding an internal drain.”
Nick picked up on the fact that I was arguing that long-established principles were at stake. Nick commented: “So to sum up, Bernanke is using an old idea, and you agree that it’s the right move?
I answered: “Yes.”
The danger of the half measure, however, of bailing out the banks but then pivoting to austerity is you wind up with the banks themselves propped up at the expensive the majority of the populace.
In the cases I can think of , austerity is never called for after the crisis (run on the bank) is over.
I would argue that’s what has happened in the United States in the last ten years.