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

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Overview

Walter Bagehot's Lombard Street, published in 1873 in the wake of a devastating London bank collapse, explained in clear and straightforward terms why central banks must serve as the lender of last resort to ensure liquidity in a faltering credit system. Bagehot's book set down the principles that helped define the role of modern central banks, particularly in times of crisis--but the recent global financial meltdown has posed unforeseen challenges. The New Lombard Street lays out the innovative principles needed to address the instability of today's markets and to rebuild our financial system.

Revealing how we arrived at the current crisis, Perry Mehrling traces the evolution of ideas and institutions in the American banking system since the establishment of the Federal Reserve in 1913. He explains how the Fed took classic central banking wisdom from Britain and Europe and adapted it to America's unique and considerably more volatile financial conditions. Mehrling demonstrates how the Fed increasingly found itself serving as the dealer of last resort to ensure the liquidity of securities markets--most dramatically amid the recent financial crisis. Now, as fallout from the crisis forces the Fed to adapt in unprecedented ways, new principles are needed to guide it. In The New Lombard Street, Mehrling persuasively argues for a return to the classic central bankers' "money view," which looks to the money market to assess risk and restore faith in our financial system.

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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

"[T]he book can be read as an important contribution in the ongoing debate on the future of central banks. In terms of monetary policy thinking, this book is another contribution to the increasing awareness that central banks, perhaps lured by seeming success of inflation targeting, in the years before 2008 did not manage to strike the right balance between monetary and financial stability."--Lars Fredrik Øksendal, Enterprise & Society

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: 400,979
  • 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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