Goodfriend: Lessons Learned from a Century of Federal Reserve Last Resort Lending (Congressional Testimony)

Goodfirend emphasizes five points in his testimony:

i) The Federal Reserve’s last resort lending powers were gradually and vastly expanded during the last century.

ii) Federal Reserve last resort lending is insufficiently disciplined by Walter Bagehot’s (1873) advice to the 19th Century Bank of England—to lend freely at a high rate against good collateral in a banking crisis.

iii) The reason is that the Bank of England’s shareholders earned the profit and bore the losses, while the fiscal authorities receive net Fed income and taxpayers bear any Fed losses.

iv) As the Fed expanded its lending reach in scale and scope, markets expanded the use of inexpensive but fragile short-term finance counting on the protection of last resort lending.

v) Federal Reserve last resort lending should be carefully circumscribed to put a stop to these destabilizing banking and money market dynamics.

Available for download here.