POLI 445 Chapter Notes - Chapter week 1-3: Collective Action, Moral Hazard, Walter Bagehot
29 Sep 2018
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The lender of last resort role of the central bank is to prevent and mitigate crises. One definition of lender of last resort (llr): Capable and must lend to prevent insolvency when no one else is capable or willing. Central bank (cb) is only llr in monetary systems like those of the us. To prevent liquid banks from closing cb should lend on any marketable collateral in the ordinary course of business when there is no panic. Cb loans should be made in large amounts on demand at higher than market interest rates to discourage borrowing that can find accommodation in the market. Insolvent financial institutions should be sold at market price or liquidated if no bids, losses should be borne by owners of equity and so on as in bankruptcy proceedings. Another purpose would be to prevent panic-induced declines of the money stock. No other institutions have played this role, us treasury, j. p. morgan, private clearing houses.
