One-Pager No. 40 | September 2013
The Fed Rates that Resuscitated Wall Street
Nicola Matthews, University of Missouri–Kansas City, presents the main findings of her research on the Fed’s lending practices following the global financial crisis of 2008. Applying Walter Bagehot’s principles, she finds that the Fed departed from the traditional lender-of-last-resort function of a central bank by lending to insolvent banks without good collateral--and below penalty rates. Most of the Fed’s emergency facilities lent at rates that were, on average, at or below market rates, with the big banks the primary beneficiaries. The Fed went beyond aiding markets to effectively making markets. Reform, Matthews concludes, is the only solution.
Bagehot's rule Central bank policy Federal Reserve emergency credit and liquidity facilities Lender of last resort (LOLR) Monetary policy