Perversion of central banks “lender of last resort” role


Charles I. Plosser (Phil Fed) – “Pressure on central banks is also showing up through other channels. In some circles, it has become fashionable to invoke “lender of last resort” arguments as a reason for central banks to engage in fiscal actions. This is a strained argument at best. The basic role of a lender of last resort is to provide liquidity to financial institutions that are solvent but facing temporary liquidity problems. Yet recently, some have used the concept to argue that the central bank should be the lender of last resort to governments. This is a perversion of one of central banking’s core concepts. It is a fig leaf to conceal the process of monetizing the sovereign debt of those countries that are insolvent due to their inability to manage their fiscal affairs. Monetary policy should not be used to solve a fiscal crisis.”

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About bzik2

A beginning central banker with a twist
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