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Circulation or Category? A Null Result on the Boundary of the Lender of Last Resort

Author

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  • Allan Pedersen

Abstract

What sets the boundary of the safety net? In a crisis a central bank rescues some private near-monies and lets others fail, and a tempting answer to which is that rescue tracks an entity's position in the payment, settlement and collateral plumbing, its "circulation-centrality", rather than its size or its legal category. This paper builds that hypothesis into a falsifiable test and reports that it fails. On a panel of thirty rescue decisions from 1970 to 2023, a blind-coded index of circulation-centrality at first appears to separate the rescued from the abandoned. The appearance does not survive scrutiny. Blind coding removes a thirteen-point hindsight inflation in the author's own scoring; dropping two index components that quietly restate the rescue trigger removes the construct's circular content; and correcting two contested keystone cases (Lehman Brothers, whom the Federal Reserve could have saved, and Washington Mutual, whose depositors were in fact protected) removes the rest. Conditioning on legal-political capacity rather than deleting the inconvenient cases, the circulation signal falls to a partial correlation of 0.13, and under an independent coder's blind reconstruction of the covariates it does not appear at all. The boundary of last-resort lending is governed by size and political-legal capacity, the familiar too-big-to-fail account, not by a distinct circulation construct. The paper offers the test as a reusable template and the false positive as a cautionary anatomy.

Suggested Citation

  • Allan Pedersen, 2026. "Circulation or Category? A Null Result on the Boundary of the Lender of Last Resort," Philosophers Mint Working Papers 6, Philosophers Mint.
  • Handle: RePEc:pmt:wpaper:6
    DOI: 10.2139/ssrn.7131482
    Note: A companion research note, "The Anatomy of a False Positive", develops the methodological half of the argument. Also available on SSRN (10.2139/ssrn.7131482).
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    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G01 - Financial Economics - - General - - - Financial Crises
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative
    • B41 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Economic Methodology

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