The Domestic Lender of Last Resort

Robert Z. Aliber, Charles P. Kindleberger and Robert McCauley
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Robert Z. Aliber: University of Chicago
Charles P. Kindleberger: Massachusetts Institute of Technology

Chapter Chapter 11 in Manias, Panics, and Crashes, 2023, pp 267-289 from Springer

Abstract: Abstract The domestic lender of last resort stands ready to halt a run out of real and illiquid financial assets into money by making more money available to meet the demand. If exit is easy, the rush to exit eases. The dilemma for the lender of last resort—the moral hazard argument—is that if bank managers believe that their firms will be supported in distress, they will be less cautious in making risky loans or depending on flighty funding during the next boom. National central banks have evolved into last resort lenders. The rule to lend freely to solvent banks on sound collateral faces the difficulty that both solvency and soundness depend on the course of the panic. A certain amount of uncertainty, but not too much, builds self-reliance in the market.

Date: 2023
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DOI: 10.1007/978-3-031-16008-0_11

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