5 Comments

I loved this story for its clarity then, and now. Two questions:

1) Why did it take almost 50 years between this episode and what Walter Bagehot wrote in Lombard Street: A Description of the Money Market that ultimately led to the discount window and other forms of emergency liquidity facilities etc. by central banks? (It is unbelievable that the Europeans started the ECB without this function in the ECB's charter; Draghi changed that).

2) How might the lender-of-the-last-resort function change, or who would the lender lend to, when the shadow banking system is Private Credit? Does Private Credit have ready access to the discount window? That problem looks like a decentralized monster, unless it is securitized and traded like MBSs in 2008-09.

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Once bailed out shouldn't the bank belong to the government?

Should there be some penalty to the board and executives running the bank?

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What a great story. How little has changed. How little is about economics, merit or judgment, and how much is about connections, social status and shared class interest.

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A frank central bank (none of them are) would inscribe Governor Harmon's words on its portal, perhaps on two tablets:

"We lent … by every possible means an in modes we had never adopted before; we took in stock on security, we purchased Exchequer bills, we made advances on Exchequer bills, we not only discountered outright, but we made advances on the deposit of bills of exchange to an immense amount, in short, by every possible means consistent with the safety of the Bank, and we were not on some occasions over-nice."

The point here is that the well-run banks will protect themselves from any crisis they can anticipate. But their imagination is limited, and new crises come in new ways. Hence, crisis management is always transgressive, and cannot be limited by rules on the central bank.

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SVB was solvent too, just not at the strike of Midnight because they held US Treasuries the deepest broad collateral in the world. You would of thought the Fed’s Powell would have learned something from your tale.

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