The Political Economy of Liquidity, Part II (Spring Term 2024)
Session 1: Emergency Liquidity Management: Bagehot versus Kindleberger
February 26, 2024
How should central banks organize their emergency liquidity management? Oft-cited is the Bagehot maxime, which advises lending freely against collateral but at high rates. Actual lending practices in recent crises (from 2008 to 2020 to 2022/2023) are closer to Kindlebergers’ account of emergency interventions, which have been more discretionary and less punitive than Bagehot’s maxime. The reason may be that in the midst of a crisis, distinguishing between insolvent and illiquid financial intermediaries may be impossible. Nonetheless, this practice poses questions of moral hazard and encourages private actors to take on additional risks in the expectation that should the risk materialize, central banks will stand ready to absorb it. This session discusses these different approaches to liquidity management, their interaction with the foreign exchange regime (gold standard vs. floating rates), and their implications for the future of finance.
Commentators: Perry Mehrling and Waltraud Schelkle
Zoom Link: https://columbiauniversity.zoom.us/j/91268710173?pwd=VEpXbm1FZXAyMnhEZVJGWjRiTklUUT09&from=addon
Assigned Readings: https://drive.google.com/drive/folders/18rGZxgFWxmjeJto3qEb2wF4etF_nuTaX?usp=drive_link
