Debt, Deregulation and Financial Crises
Chapter 28: Implications of the proposed system for the conduct of policy
The proposed system restores the ability of financial institutions to borrow and lend reserves and reduces pressure on asset sales. Unlike other financial assets and liabilities, reserves held with the Fed retain their face value and their use in transactions among financial institutions would preserve confidence. More importantly, unlike capital, their ability to be created and extinguished by the Fed would restore its ability to be an effective systemic lender of last resort. In addition, the new system would allow the Fed to constrain or stimulate flows to specific asset types or financial sectors and thus deal more effectively with asset bubbles and credit crunches. It could also buy foreign securities in repo operations to moderate the effects of excessive capital inflows. Ensuring that the Fed has these and other monetary powers would restore its ability to meet its mandate to provide the stability needed to enhance the nation’s macroeconomic performance.
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