"Yet, in response to this crisis, the Federal Reserve reacted like Bagehot on steroids. "

Via the WSJ, Richard Fisher of the Dallas Fed:

"Again, some historical context. The basic manual for a central bank’s response to a panic was written in the early 19th century by two Englishmen, Walter Bagehot and Henry Thorton. Bagehot’s prescription to counter a panic was as follows: “The holders of the cash reserve must be ready not only to keep it for their own liabilities, but to advance it most freely for the liabilities of others. They must lend to merchants, to minor bankers, to ‘this man and that man’ whenever the security is good.” He wrote of how, during the Panic of 1825, the Bank of England “lent by every possible means and in modes … never adopted before.” Also bearing in mind the advice of Thorton, who in 1802 wrote that “it is by no means intended to imply that it would become the (Central) Bank to relieve every distress which the rashness of (financiers) may bring upon themselves…. The relief should neither be so … liberal as to exempt those who misconduct their business … nor so scanty and slow as deeply to involve the general interests. These interests, nevertheless, are sure to be pleaded by every distressed person whose affairs are large, however indifferent or ruinous may be their state.”

Central bankers are generally considered the most laconic genus of the human species. Yet, in response to this crisis, the Federal Reserve reacted like Bagehot on steroids. We have not quite lent “to this man and that man.” But beginning with the announcement on December 12 of last year of our term auction facility, we have reached deep into our tool kit to “lend by every possible means and in modes … never adopted before.” We have been neither “scanty” nor “slow.” In rapid order, the Federal Reserve has stretched out the terms with which we lend to bankers; accepted new forms of collateral; broadened access to our lending window to securities dealers and one particular insurance company—AIG—whose failure was deemed by the Federal Reserve Board to present a risk to the financial system; opened a window for financing commercial paper; backstopped money market mutual funds; and, recognizing that we are inextricably interwoven with a global economy, established swap lines to help meet the dollar-funding needs of 14 central banks, ranging from the European Central Bank and the Bank of England to the Banco de México and the Singapore Monetary Authority, the total of which now aggregates to hundreds of billions of dollars. And our staff and policymakers have provided substantial intellectual input into activities of other regulators, such as the FDIC and the Treasury, as they develop innovative means and modes of recapitalizing the banking system, dealing with the mortgage crisis and restoring economic growth."

I'm fine with a lot of this, although not all their moves, and I endeavor to follow Bagehot.

But Bagehot also tried to put in rules and terms to avoid these kinds of crises. Let's use Bagehot on steroids to reduce the chances of this or a similar event occurring again.