Bernanke: Fed Role as Lender of Last Resort Is Key

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Jan. 16 (Bloomberg) – Federal Reserve Chairman Ben Bernanke discusses central banking and the financial crisis of 2008 at the Brookings Institution in Washington. (Source: Bloomberg)

Relied on, essentially given by a british economist in 1860's, and his victim was that in a financial crisis, the central bank should lend unlimited amounts to solvent institutions against good collateral at a penalty rate.

How useful in practice was that role in guiding you?

It was excellent advice, used by central banks going back at least since the 1700's. when you have a market or a financial system short of liquidity and there is a lack of confidence and a panic, then the central bank is the last resort that can provide the cash and liquidity to calm the panic and make sure depositors and other short-term lenders are able to get their money.

In the conduct of the crisis in 2008, the main difference was the financial system we have today looked very different in the details, if not in its conceptual structure, from what walter saw in the 19th century.

The challenge for us at the fed was to adapt to the advice to the concept of the modern financial system.

Instead of having retail depositors standing in line out the doors, the case in the 1907 panic of the united states, we instead had runs by wholesale short-term lenders, like repo lenders or commercial or -- commercial lenders.

We had to find ways to essentially provide liquidity to stop those.

It was a different institutional context.

Very much an approach that was entirely consistent with recommendations.

You also, rather than lending only in constitutions, you intervened in markets.

Is there a similarly pithy get to, a bernanke role, that you could come up with about when the fed should intervene in markets and when it should not?

If we are talking about the crisis time, all the interventions we did fit under the batch of padding, for example.

The commercial paper facility we set up was designed essentially to prevent a run on this particular form of financing.

It was a different institutional structure but again essentially the same rule applied in the same institutional context.

We have done other interventions, if you will, with our asset purchase program.

I would call that the monetary policy part of our response.

While analogies between it's a wonderful life and people running on the thrift, are not always immediately obvious, there was in fact a very close parallel in the whole response.

The crisis began in august of

This text has been automatically generated. It may not be 100% accurate.


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