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

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

by Perry Mehrling
Pub. Date:
Princeton University Press
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The New Lombard Street: How the Fed Became the Dealer of Last Resort

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.

Product Details

ISBN-13: 9780691143989
Publisher: Princeton University Press
Publication date: 11/08/2010
Pages: 184
Sales rank: 949,990
Product dimensions: 5.60(w) x 8.50(h) x 0.90(d)

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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