The New Lombard Street: How the Fed Became the Dealer of Last Resort

The U.S. Federal Reserve began actively intervening in markets to ensure liquidity in a faltering credit system, as explained in Walter Bagehot's Lombard Street. The New Lombard Street by Perry Mehrling argues for a return to the classic central bankers' money view to address the instability of today's markets and rebuild the financial system.

Format: Paperback / softback
Length: 192 pages
Publication date: 29 November 2022
Publisher: Princeton University Press

The United States Federal Reserve (Fed) has been actively intervening in financial markets since its establishment in 1913. The need for such interventions became increasingly apparent in the aftermath of the Great Depression, when the banking system faced severe liquidity constraints and economic instability.

One of the key insights provided by Walter Bagehot's book "Lombard Street" published in 1873 was the importance of central banks as the lender of last resort. Bagehot argued that in times of crisis, central banks should provide liquidity to the banking system to prevent financial collapse and restore economic stability.

Since the establishment of the Fed, the role of central banks in intervening in markets has evolved. In the early years, the Fed primarily focused on regulating the banking system and maintaining price stability. However, with the onset of the global financial crisis in 2008, the Fed took on a more active role in managing financial markets.

One of the key interventions by the Fed during the crisis was the implementation of quantitative easing (QE) programs. QE involves the purchase of government securities and other assets by the central bank to increase the money supply and lower interest rates. This policy aimed to stimulate economic growth and reduce unemployment.

Another intervention by the Fed was the establishment of the Federal Reserve Bank of New York as the clearinghouse for the U.S. dollar. The New York Fed plays a crucial role in managing the liquidity of the financial system and ensuring the stability of the dollar.

Despite the success of these interventions, the global financial crisis has also highlighted the limitations of central bank intervention. Some critics argue that QE programs have contributed to asset bubbles and increased financial instability. Additionally, the power of central banks to regulate financial markets has been questioned, particularly in light of the recent rise of non-bank financial institutions and shadow banking.

In response to these challenges, there has been a growing call for a more balanced approach to financial regulation. Some policymakers argue for the creation of a new regulatory framework that would include both central banks and other financial regulators. Others advocate for a return to the classic central bankers' money view, which emphasizes the importance of the money market in assessing risk and restoring faith in the financial system.

Overall, the history of central bank intervention in financial markets is a complex and evolving topic. While central banks have played a crucial role in preventing financial crises and promoting economic stability, there are still challenges to be addressed in the future. A balanced approach to financial regulation that combines the expertise of central banks and other regulators is likely to be key to ensuring the long-term health and stability of the global financial system.
The United States Federal Reserve (Fed) has been actively intervening in financial markets since its establishment in 1913. The need for such interventions became increasingly apparent in the aftermath of the Great Depression, when the banking system faced severe liquidity constraints and economic instability.

One of the key insights provided by Walter Bagehot's book "Lombard Street" published in 1873 was the importance of central banks as the lender of last resort. Bagehot argued that in times of crisis, central banks should provide liquidity to the banking system to prevent financial collapse and restore economic stability.

Since the establishment of the Fed, the role of central banks in intervening in markets has evolved. In the early years, the Fed primarily focused on regulating the banking system and maintaining price stability. However, with the onset of the global financial crisis in 2008, the Fed took on a more active role in managing financial markets.

One of the key interventions by the Fed during the crisis was the implementation of quantitative easing (QE) programs. QE involves the purchase of government securities and other assets by the central bank to increase the money supply and lower interest rates. This policy aimed to stimulate economic growth and reduce unemployment.

Another intervention by the Fed was the establishment of the Federal Reserve Bank of New York as the clearinghouse for the U.S. dollar. The New York Fed plays a crucial role in managing the liquidity of the financial system and ensuring the stability of the dollar.

Despite the success of these interventions, the global financial crisis has also highlighted the limitations of central bank intervention. Some critics argue that QE programs have contributed to asset bubbles and increased financial instability. Additionally, the power of central banks to regulate financial markets has been questioned, particularly in light of the recent rise of non-bank financial institutions and shadow banking.

In response to these challenges, there has been a growing call for a more balanced approach to financial regulation. Some policymakers argue for the creation of a new regulatory framework that would include both central banks and other financial regulators. Others advocate for a return to the classic central bankers' money view, which emphasizes the importance of the money market in assessing risk and restoring faith in the financial system.

Overall, the history of central bank intervention in financial markets is a complex and evolving topic. While central banks have played a crucial role in preventing financial crises and promoting economic stability, there are still challenges to be addressed in the future. A balanced approach to financial regulation that combines the expertise of central banks and other regulators is likely to be key to ensuring the long-term health and stability of the global financial system.

The New Lombard Street, a book by Perry Mehrling, provides an innovative set of principles to address the instability of today's markets and rebuild our financial system. Mehrling traces the evolution of ideas and institutions in the American banking system since the establishment of the Federal Reserve in 1913, highlighting how the Fed adapted classic central banking wisdom from Britain and Europe to America's unique and considerably more volatile financial conditions.

One of the key insights in The New Lombard Street is the importance of a return to the classic central bankers' money view. This view emphasizes the money market as a key tool for assessing risk and restoring faith in the financial system. Mehrling argues that the Fed should rely on the money market to assess risk and determine the appropriate monetary policy response, rather than relying on traditional measures such as interest rates.

Mehrling also criticizes the current regulatory framework, which he argues is outdated and inadequate for the modern financial system. He argues that the current regulatory structure is fragmented and lacks coordination, leading to gaps in oversight and enforcement. Mehrling proposes a new regulatory framework that would be more comprehensive and coordinated, with a focus on promoting stability and transparency in the financial system.

In addition to his proposals for regulatory reform, Mehrling also offers insights into the current financial crisis and its implications for the future. He argues that the crisis was caused by a combination of factors, including excessive leverage, inadequate risk management, and a lack of regulatory oversight. Mehrling suggests that these factors can be addressed through a combination of regulatory reform and changes in financial culture.

Overall, The New Lombard Street is a thought-provoking book that offers a fresh perspective on the current financial crisis and the challenges facing the global financial system. Mehrling's innovative principles and proposals for regulatory reform provide a roadmap for rebuilding our financial system and promoting stability and transparency in the years to come.

Dimension: 216 x 140 (mm)
ISBN-13: 9780691242200