The Evolution of Last-Resort Operations in the Global Credit Crisis

27 Pages Posted: 13 Mar 2013

See all articles by David Grad

David Grad

Columbia University

Perry Mehrling

Columbia University, Graduate School of Arts and Sciences, Department of Economics

Daniel H. Neilson

Bard College at Simon's Rock

Date Written: March 18, 2011

Abstract

The financial crisis that began in 2007 took place in the context of a secular shift from a bank-loan financial system to a capital-markets financial system — that is, from one based on nontradable financial assets, with banks playing the key intermediary role, to one based on tradable securities, with dealers playing the key intermediary role. We argue that the system’s response to the crisis can be viewed as moving from a private lender of last resort, through a public lender of last resort, to a dealer of last resort. It was the last that was finally able to stabilize the system, because it is the response suited to a liquidity crisis in the capital-markets financial system where the problem arose. We use a balance-sheet approach to trace out the breakdown of the so-called shadow banking system and the measures taken first in the private money markets and then by the Federal Reserve to restore liquidity to the financial system.

JEL Classification: E58, G01, G21

Suggested Citation

Grad, David and Mehrling, Perry and Neilson, Daniel H., The Evolution of Last-Resort Operations in the Global Credit Crisis (March 18, 2011). Available at SSRN: https://ssrn.com/abstract=2232348 or http://dx.doi.org/10.2139/ssrn.2232348

David Grad

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

Perry Mehrling

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

Daniel H. Neilson (Contact Author)

Bard College at Simon's Rock ( email )

84 Alford Road
Great Barrington, MA Massachusetts 01230
United States
+1 413 274 4033 (Phone)

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