The Evolution of Last-Resort Operations in the Global Credit Crisis
27 Pages Posted: 13 Mar 2013
Date Written: March 18, 2011
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: Suggested Citation