New Directions in Post-Keynesian Theory
Edited by Louis-Philippe Rochon and Salewa ‘Yinka Olawoye
Chapter 7: Central Bank Responses to Financial Crises: Lenders of Last Resort in Interesting Times
Robert Dimand and Robert Koehn The present signs indicate that the bankers of the world are bent on suicide. At every stage they have been unwilling to adopt a sufficiently drastic remedy. And by now matters have been allowed to go so far that it has become extraordinarily difficult to find any way out. It is necessarily part of the business of a banker to maintain appearances and to confess a conventional respectability which is more than human. Lifelong practices of this kind make them the most romantic and the least realistic of men. (John Maynard Keynes, 1931b, p. 178) “The central bankers have all learned the lesson of the 1930s,” said Robert Barbera, the chief economist of ITG, a Wall Street firm. That lesson was that if the choice is between allowing the system to collapse and writing a lot of checks, you write the checks and forget about ideology. Unfortunately, none of them learned the lesson of the 1920s, which is that when asset prices soar, it is not a good idea to sit around doing nothing, as the Fed did for most of the housing boom. Cheerleading, which it sometimes did, is even worse. (Norris, 2008, p. B8) 1 INTRODUCTION: THE DIVERSITY OF CENTRAL BANK RESPONSES TO CRISIS The daunting challenges facing central bankers in the financial crisis that began in August 2007 are reflected in the shocked tone of the minutes of the Federal Open Market Committee (FOMC) meeting of December 15 and 16, 2008 (Andrews,...
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