I doubt a week has gone by since last summer during which I haven't seen some pundit or other trot out Walter Bagehot's dictum that in the event of a credit crunch, the central bank should lend freely at a penalty rate. More often than not, this is contrasted with the actions of the Federal Reserve, which seems to be lending freely at very low interest rates.
Ben Bernanke, in a speech today, addressed this criticism directly:
What are the terms at which the central bank should lend freely? Bagehot argues that "these loans should only be made at a very high rate of interest". Some modern commentators have rationalized Bagehot's dictum to lend at a high or "penalty" rate as a way to mitigate moral hazard--that is, to help maintain incentives for private-sector banks to provide for adequate liquidity in advance of any crisis. I will return to the issue of moral hazard later. But it is worth pointing out briefly that, in fact, the risk of moral hazard did not appear to be Bagehot's principal motivation for recommending a high rate; rather, he saw it as a tool to dissuade unnecessary borrowing and thus to help protect the Bank of England's own finite store of liquid assets. Today, potential limitations on the central bank's lending capacity are not nearly so pressing an issue as in Bagehot's time, when the central bank's ability to provide liquidity was far more tenuous.
I'm no expert on Walter Bagehot, and in fact I admit I've never read Lombard Street. But I'll trust in Bernanke as an economic historian on this one, unless and until someone else makes a persuasive case that Bagehot's penalty rate really was designed to punish the feckless rather than just to preserve the Bank of England's limited liquidity."
4 comments:
Hey "libertarian Democrats." I've noticed Dems in general have become more Nanny-State these past few years. The Party that used to support legalizing Pot, now is fiercely Pro-Drug War. But they've even expanded into support smoking bans on tobacco EVERYWHERE including bars, bingo parlors and bowling alleys.
But that's not all. Democrats today push seat belt laws in all 50 states, with increased fines and even imprisonment for libertarians who buck the mandatory seat belt laws.
And they now want to reduce the speed limit to 55 mph.
Will the so-called "libertarian Democrats" join with us real Libertarians in opposing Democrat attempts to impose Nanny-State regulations on every aspect of our lives?
Or, is "libertarian Democrat" more of a two-month long election season trick by some leftwing Bloggers, to mullify the libertarian swing vote, and keep libertarians from voting for McCain/Palin, similar to what Daily Kos and Markos Moulitas pulled late in 2006 with the "libertarians should vote Democrat" meme?
My guess is that we won't see this blog around, or any similar attempts to pull the wool over the eyes of libertarians starting Nov. 5.
Eric, You missed the press release. The whole point of this blog is to develop the agenda of the libertarian Democrat in order to influence policy in the party. It will stand or fall on the ideas presented, as well as developed by other libertarian Democrats. I'm here for the long run. Whether anyone will read this blog or not, I don't know.
I always find blanket statements applied to a party of cat herders most amusing. Sure, some Democrats are like that, but many others aren't.
There's plenty of growth potential for libertarian Democrats, particularly in the Intermountain West. The fact two of the individuals most often mentioned as libertarian Democrats, Brian Schweitzer and Jon Tester, are both from Montana is no accident.
As for me, I'm keeping an eye on my options for '10 here on the west side of the Bitterroot Range.
Thanks for thinking of me, Don.
Thanks for the comments faustus37. I've put your web page on my blog. I'll keep following you, and help any way I can. I hope Kos continues to feature your posts.
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