Expanding Social Protection in Developing Countries: A Gender Perspective
Walter Bagehot's putative principles of lending in liquidity crisesâ€”to lend freely to solvent banks with good collateral but at penalty ratesâ€”have served as a theoretical basis for thinking about the lender of last resort for close to 100 years, while simultaneously providing justification for central bank real-world intervention. If we presume Bagehot's principles to be both sound and adhered to by central bankers, we would expect to find the lending by the Fed during the global financial crisis in line with such policies. Taking Bagehot's principles at face value, this paper aims to examine one of these principlesâ€”central bank lending at penalty ratesâ€”and to determine whether it did in fact conform to this standard. A comprehensive analysis of these rates has revealed that the Fed did not, in actuality, follow Bagehot's classical doctrine. Consequently, the intervention not only generated moral hazard but also set the stage for another crisis. This working paper is part of the Ford Foundation project "A Research and Policy Dialogue Project on Improving Governance of the Government Safety Net in Financial Crisis" and continues the investigation of the Fed's bailout of the financial systemâ€”the most comprehensive study of the raw data to date.
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- Crockett, A, 1997. "The Theory and Practice of Financial Stability," Princeton Essays in International Economics 203, International Economics Section, Departement of Economics Princeton University,.
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