The New Lombard Street: How the Fed Became the Dealer of Last Resort

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Overview

"The global financial system is badly broken. Many institutions and individuals share responsibility for the development of pathologies in and around our largest banks, but the buck stops, literally and figuratively, with the Federal Reserve. If you would like to understand how this happened—and how we (and the Fed) might inch back from the precipice—read this book."—Simon Johnson, coauthor of 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown

"Informed by history, a model of clear thought and lucid prose, The New Lombard Street is by far our best guidebook to the changed structure of financial markets and the new role of the Federal Reserve. It also charts a new path for monetary policymakers and—given the scale of the crisis—not a minute too soon."—James K. Galbraith, author of The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too

"In Lombard Street, Walter Bagehot laid out the financial market lore and central banking wisdom of his day—the 1870s. Today's markets are different, and so is what constitutes useful policy. In The New Lombard Street, Perry Mehrling blends his rich historical knowledge with an acute analysis of current-day markets to suggest what constitutes sound central banking and financial regulation for our time. The result merits close attention from policymakers, and the rest of us too."—Benjamin M. Friedman, author of The Moral Consequences of Economic Growth

"No one else has come close to the achievement of this book in relating the crisis to the prior history of monetary thought and central bank practice. A masterful, original, and beautifully constructed work."—Charles A. E. Goodhart, London School of Economics and Political Science

"The New Lombard Street makes a serious and successful effort to deepen our understanding not just of the last century or more of U.S. monetary history, but also of the way in which economic analysis has evolved alongside that history. I very much enjoyed reading this book. It is timely, provocative, and well written."—David Laidler, professor emeritus, University of Western Ontario

"This is a wonderful book that offers a fresh understanding of the role of the central bank in the world of modern finance."—Roger E. Backhouse, University of Birmingham

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Editorial Reviews

Choice
A well-written, scholarly dissection that should be required reading for all graduate courses (and perhaps some advanced undergraduate) in macroeconomics or monetary economics.
Bloomberg News
With lucid precision, Mehrling traces the history of how Fed policy makers became biased toward 'excessive elasticity'. . . . Mehrling saves the best for the end, where he describes the Fed's battle to save the system with an alphabet soup of lending programs.
— James Pressley
Marginal Revolution
I continue to ponder Mehrling's main claims, but in any case this is an important book about the new Fed.
— Tyler Cowen
Tulsa World
In The New Lombard Street, Perry Mehrling . . . provides a lucid account of how the system worked when it was working—and of the growing role assumed by the Fed in an era of global economic volatility and 'credit-fueled bubbles.'
— Glenn C. Altschuler
Mike Konczal blog
[A] fantastic book.
— Rortybomb
Central Banking Journal
[I]mportant. . . . Mehrling's new book tries to do just what Bagehot did: to give an account both of how and why the Fed acted when it reinvented the rules in the middle of a financial crisis, and of what the implications for future monetary policy will be.
— Harold James
Business Economist
This is an excellent and accessible analysis for anyone wishing to understand the origins of the financial crisis and how the Fed came to respond as it did.
— Larry Hatheway
Bloomberg News - James Pressley
With lucid precision, Mehrling traces the history of how Fed policy makers became biased toward 'excessive elasticity'. . . . Mehrling saves the best for the end, where he describes the Fed's battle to save the system with an alphabet soup of lending programs.
Marginal Revolution - Tyler Cowen
I continue to ponder Mehrling's main claims, but in any case this is an important book about the new Fed.
Tulsa World - Glenn C. Altschuler
In The New Lombard Street, Perry Mehrling . . . provides a lucid account of how the system worked when it was working—and of the growing role assumed by the Fed in an era of global economic volatility and 'credit-fueled bubbles.'
Mike Konczal blog - Rortybomb
[A] fantastic book.
Central Banking Journal - Harold James
[I]mportant. . . . Mehrling's new book tries to do just what Bagehot did: to give an account both of how and why the Fed acted when it reinvented the rules in the middle of a financial crisis, and of what the implications for future monetary policy will be.
Business Economist - Larry Hatheway
This is an excellent and accessible analysis for anyone wishing to understand the origins of the financial crisis and how the Fed came to respond as it did.
From the Publisher
"A well-written, scholarly dissection that should be required reading for all graduate courses (and perhaps some advanced undergraduate) in macroeconomics or monetary economics."—Choice

"With lucid precision, Mehrling traces the history of how Fed policy makers became biased toward 'excessive elasticity'. . . . Mehrling saves the best for the end, where he describes the Fed's battle to save the system with an alphabet soup of lending programs."—James Pressley, Bloomberg News

"I continue to ponder Mehrling's main claims, but in any case this is an important book about the new Fed."—Tyler Cowen, Marginal Revolution

"In The New Lombard Street, Perry Mehrling . . . provides a lucid account of how the system worked when it was working—and of the growing role assumed by the Fed in an era of global economic volatility and 'credit-fueled bubbles.'"—Glenn C. Altschuler, Tulsa World

"[A] fantastic book."—Rortybomb, Mike Konczal blog

"[I]mportant. . . . Mehrling's new book tries to do just what Bagehot did: to give an account both of how and why the Fed acted when it reinvented the rules in the middle of a financial crisis, and of what the implications for future monetary policy will be."—Harold James, Central Banking Journal

"This is an excellent and accessible analysis for anyone wishing to understand the origins of the financial crisis and how the Fed came to respond as it did."—Larry Hatheway, Business Economist

Library Journal
Mehrling (economics, Barnard Coll.) analyzes the recent financial crisis, focusing specifically on the role of the Federal Reserve. "Lombard Street" in the title is a reference to an 1873 work in which Walter Bagehot, an early editor of theEconomist, theorizes that the central bank must act as a "lender of last resort" by creating a safety net for private banks. Mehrling expands upon Bagehot's analysis to conclude that the central bank must also act as a "dealer of last resort," stepping in to assist the private securities market when it fails to function properly. The distinction relies heavily upon complex macroeconomic and finance theories, making the book's finer points inaccessible to those without a strong foundation in economics or finance. VERDICT Readers who are not well versed in these areas and seek to deepen their understanding of the financial crisis would be better served by Joseph E. Stiglitz's Freefall: America, Free Markets, and the Sinking of the World Economy. Mehrling's book is recommended only for readers in graduate business or economics programs.—Jennifer Michaelson, Cleveland
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Product Details

  • ISBN-13: 9780691143989
  • Publisher: Princeton University Press
  • Publication date: 11/8/2010
  • Pages: 184
  • Sales rank: 431,197
  • Product dimensions: 5.60 (w) x 8.50 (h) x 0.90 (d)

Meet the Author

Perry Mehrling is professor of economics at Barnard College, Columbia University. He is the author of "Fischer Black and the Revolutionary Idea of Finance" and "The Money Interest and the Public Interest: American Monetary Thought, 1920-1970".

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Table of Contents

Acknowledgments xi
Introduction 1 A Money View Perspective 2
Lessons from the Crisis 6

Chapter One: Lombard Street, Old and New 11
The Inherent Instability of Credit 12
The Old Lombard Street 18
The New Lombard Street 23

Chapter Two: Origins of the Present System 30
From National Banking to the Fed 30
From War Finance to Catastrophe 37
Noncommercial Credit in Depression and War 43

Chapter Three: The Age of Management 48
Monetary Policy and the Employment Act 52
Listening to the Academics 57
Monetary Walrasianism 60
A Dissenting View 65

Chapter Four: The Art of the Swap 71
Currency Swaps and the UIP Norm 72
Brave New World 79
From Modern Finance to Modern Macroeconomics 85

Chapter Five: What Do Dealers Do? 92
Inside the Money Market 93
Funding Liquidity and Market Liquidity 98
Anatomy of a Crisis 103
Monetary Policy 107

Chapter Six: Learning from the Crisis 113
The Long Shadow of Jimmy Stewart 116
A Stress Test of Moulton-Martin 123
Dealer of Last Resort 132

Conclusion 136
Notes 141
References 149
Index 159

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