We have already clarified what a lender of last resort is in a previous article so in this article we will try to analyse its historical experience and recent experience.
It must be said from the outset that the growing interconnection of economies has pushed many economists towards the analysis of lenders of last resort.
Obviously there are diametrically opposed positions (but it is precisely for this reason that we like the economy) that we have reported.
Miron and Wood show that the existence of central banks has reduced the frequency of bank runs.
Miron uses data on crises between 1890 and 1908 and compares it with the period from 1915 to 1933. This allows him to reject the hypothesis that after the intervention of the FED as lender of last resort, the frequency of observed panics has not changed. The conclusion of his discussion was that “the effects of monetary policy, which included open market operations by the FED, were likely to have real effects”.
Wood compares the reaction of central banks to various crises in England, France and Italy. When there was a lender of last resort, panic did not turn into a crisis. When the central bank was unable to act, however, there was a crisis like the one in France in 1848. He concludes “that the action of the lender of last resort contains a crisis, while the absence of such action allows a localized panic to turn into a widespread banking crisis”. More recent examples are the crises in Argentina, Mexico and South-East Asia. There, the central banks could not provide liquidity because the banks had borrowed in foreign currency, which the central bank was unable to provide. Visit here for more information www.365credit.com.sg
The Bank of England is often considered the model lender of last resort as it has acted according to the classical rules of Thornton and Bagehot. “Banking scholars agree that the Bank of England in the last third of the nineteenth century was the ultimate lender. More than any other central bank before or after, he adhered to the strict classical version or Thornton-Bagehot.
The Federal Reserve system in the United States acts in a very different way and at least in a way that does not conform to Bagehotâs advice.
Humphrey has identified several ways in which modern FED departs from classic rules:
“Emphasis on credit (borrowing) as opposed to money”.
“Taking Junk Titles
“Charging of subsidy rates
“Prioritising insolvent enterprises that are too large and interconnected to fail (Too big to fail principle)
“Extension of the deadline for repayment of the loan
“No commitment announced.
Overall, the Federal Reserve has hardly ever acted as the lender of last resort it should have been. Some say that its lender of last resort has undermined its operational independence and put taxpayers at risk. Norbert J. Michel, a financial researcher, even goes so far as to say that the Federal Reserve has worsened the Great Depression by failing to play its role as lender of last resort.