Brian Romanchuk — Why Lender-Of-Last-Resort Operations Are Inevitable

Lender-of-last-resort operations by central banks (or "bailouts of the financial system") are deservedly unpopular across the political spectrum. Malcontents have argued that risky lending ought to be handled by markets, and that deposits should be fully backed by reserves or Treasury bills. Unfortunately, the believers in these theories never bother to look at the economics of short-term lending. The money markets have the structure that they have for a reason, and they only will function if there is a lender-of-last-resort that is able to step in and prop the system up. Any attempts to make the system bailout proof would have far-reaching consequences into the structure of the economy....

Bond Economics
Why Lender-Of-Last-Resort Operations Are Inevitable
Brian Romanchuk

Matias Vernengo — History of Central Banks Tutorial - Before Central Banks II

Naked Keynesianism
History of Central Banks Tutorial - Before Central Banks II
Matias Vernengo | Associate Professor of Economics, Bucknell University

Pam and Russ Martens — New York Fed President Is Worrying About the Next Crash; He Should Be

On May 1, William Dudley, the President of the New York Fed delivered a speech to the Atlanta Fed’s 2016 Financial Markets Conference. Dudley, who was previously hauled before Congress to examine his Wall Street cronyism, spent two-thirds of his talk meandering around the academic nuances of liquidity in a stressed market and then zeroed in for the kill. Dudley wants to extend the powers of the Federal Reserve as the lender of last resort beyond just banks to (wait for it) include broker-dealer stock trading operations. Under that scenario, Bernie Madoff’s market-making operation (that was also a fraud according to the Madoff Trustee Irving Picard) might have been borrowing from the Fed during the crisis of 2008. Maybe Madoff could have even borrowed enough from the Fed to still be operating.….

Wall Street On Parade
New York Fed President Is Worrying About the Next Crash; He Should Be
Pam and Russ Martens

Olivier Armantier, Helene Lee, and Asani Sarkar — History of Discount Window Stigma

The Fed stands ready with overdrafts as the lender of last resort, but there is a greater price to pay than the penalty rate — loss of institutional credibility and reputation due to either sub-standard ALM practice or financial weakness.  The Fed attempted to change that in 2003, and even tried to reverse the perception at the time of the financial crisis as part of its gargantuan effort to stabilize the system.

The post-reform DW is more consistent with Walter Bagehot’s classical principles that central banks should lend freely to illiquid but solvent institutions against good collateral but at a penalty over the “normal” market rate. By lending freely, central banks create an expectation that they will be available to provide as much liquidity as is needed during a crisis and alleviate the high demand for liquidity that triggers most crises. By charging a penalty rate, they ensure that banks borrow as a last resort.

The 2003 reforms, however, do not appear to have removed the perception of DW stigma, as shown in “Discount Window Stigma during the 2007-2008 Financial Crisis,” and DW borrowing generally remained sparse (see the second chart, above). A plausible explanation for the persistence of DW stigma is that the old policies left lasting perceptions of the DW, which, among other factors, may have dissuaded banks from readily using it to this day.

FRBNY— Liberty Street Economics
History of Discount Window Stigma
Olivier Armantier, Helene Lee, and Asani Sarkar

Frances Coppola — In defence of the (conflicted) ECB

It is the conflict of interest between ECB-as-creditor and ECB-as-liquidity-provider that makes the ECB ineffective as a lender of last resort. And because NCBs are controlled and restricted by the ECB, they too cannot act as lenders of last resort. So the Eurozone banking system effectively has no lender of last resort. The lack of a lender of last resort is terribly dangerous, since it vastly increases the likelihood of devastating systemic runs. Deposit insurance helps, but since that too is dependent on sovereign solvency there is a gaping hole in the infrastructure supporting the Eurozone financial system.

How to resolve this? The "doom loop" between sovereigns and banks must be broken: the funding of banks must be separated from the solvency of sovereigns, as must the funding of deposit insurance. That means full banking union, common deposit insurance and the issuance of Eurozone-level bonds that can be used by banks as safe assets. The ESM is a step in the right direction, but the current "banking union" is utterly inadequate. Much more needs to be done if the Eurosystem is to become effective as both lender and dealer of last resort.

Frances examines EZ structure and law. The EZ is set up without a lender of last resort, which all but guarantees serious breakdowns.

Coppola Comment
In defence of the (conflicted) ECB
Frances Coppola

Peter Dorman — Jens Weidmann on Central Banks as Lenders of Last Resort (Not)

Frankly, I think Weidmann should sue the reporter who put these words into his mouth—obviously a crude attempt to make him sound like a yahoo who doesn’t know the first thing about his line of work.

Department of "WTF?"

Econospeak
Jens Weidmann on Central Banks as Lenders of Last Resort (Not)

Peter Dorman | Professor of Political Economy, The Evergreen State College

Super-Sizing Public Knowledge and Situational Awareness

commentary by Roger Erickson

Here's an alternative book to recommend to those who won't believe any novel currency operations advice from just one source.

It's always better to have independent support for a view. Few will believe something that they think only one person espouses. Most people are intellectual cowards, and will do anything in their power to avoid thinking ... and thereby quickly examining tough questions for themselves, even if only one person in the entire world is raising them.

Financial Crises, Contagion, and the Lender of Last Resort: A Reader
(only $25 at Amazon)

Do you realize how much faster our entire populace could learn if EVERYTHING was immediately put online, for minimal cost? I'm talking pennies, not dollars.  We super-sized Pepsi back in 1981. Why not Super-Size public knowledge and situational awareness?

This goes along with another book already 2 years old, and read by too few to matter.

Unsettled Account: The Evolution of Banking in the Industrialized World since 1800. Richard S. Grossman, 2010. Princeton University Press, Princeton.
review:  sounds like mostly theory, & less about operations
$33 at Amazon

Ever seen a book specifically on the History of Banking Operations?
How rare is it to find good operations people, in any field, who will stoop to writing a history book?

Back to Open Access. It's occurring, inevitably, but far too slowly. For culture-wide access, tempo counts.

Ten Years after Budapest Open Access Initiative New Recommendations Released

10 years? What part of "Adaptive Rate" don't these people understand? Anything not accelerating adaptive rate = stagnation, by definition.

What part of past & emerging "culture" shouldn't be distributed to an expanding culture's populace - as far and fast as possible?

It's not just the finance industry that is more trouble than it's worth. Our entire publishing and knowledge-dissemination industry is also rapidly sliding into that category.

Ramanan — William Dudley on Bank Lending

Dudley: " If banks want to expand credit and that drives up the demand for reserves, the Fed automatically meets that demand in its conduct of monetary policy. In terms of the ability to expand credit rapidly, it makes no difference whether the banks have lots of excess reserves or not."

It may seem obvious, but as Ramanan notes, not many central bankers are saying this publicly.

Read the whole quote at Ramanan's.

Read it at The Case for Concerted Action
William Dudley On Bank Lending

by Ramanan