Circulation or Category? A Null Result on the Boundary of the Lender of Last Resort

Allan Pedersen

No 6, Philosophers Mint Working Papers from Philosophers Mint

Abstract: What sets the boundary of the safety net? In a crisis a central bank rescues some private near-monies and lets others fail, and a tempting answer to which is that rescue tracks an entity's position in the payment, settlement and collateral plumbing, its "circulation-centrality", rather than its size or its legal category. This paper builds that hypothesis into a falsifiable test and reports that it fails. On a panel of thirty rescue decisions from 1970 to 2023, a blind-coded index of circulation-centrality at first appears to separate the rescued from the abandoned. The appearance does not survive scrutiny. Blind coding removes a thirteen-point hindsight inflation in the author's own scoring; dropping two index components that quietly restate the rescue trigger removes the construct's circular content; and correcting two contested keystone cases (Lehman Brothers, whom the Federal Reserve could have saved, and Washington Mutual, whose depositors were in fact protected) removes the rest. Conditioning on legal-political capacity rather than deleting the inconvenient cases, the circulation signal falls to a partial correlation of 0.13, and under an independent coder's blind reconstruction of the covariates it does not appear at all. The boundary of last-resort lending is governed by size and political-legal capacity, the familiar too-big-to-fail account, not by a distinct circulation construct. The paper offers the test as a reusable template and the false positive as a cautionary anatomy.

Keywords: lender of last resort; too big to fail; systemic importance; central-bank rescue; financial safety net; blind coding; replication; null result (search for similar items in EconPapers)
JEL-codes: B41 E58 G01 G28 N20 (search for similar items in EconPapers)
Date: 2026-07
Note: A companion research note, "The Anatomy of a False Positive", develops the methodological half of the argument. Also available on SSRN (10.2139/ssrn.7131482).
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Persistent link: https://EconPapers.repec.org/RePEc:pmt:wpaper:6

DOI: 10.2139/ssrn.7131482

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