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The Little Book of Economics: How the Economy Works in the Real World, Revised and Updated
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The Little Book of Economics: How the Economy Works in the Real World, Revised and Updated

by Greg Ip
January 2013
Beginner content levelBeginner
258 pages
4h
English
Wiley
Content preview from The Little Book of Economics: How the Economy Works in the Real World, Revised and Updated

Chapter Twelve

When the World Needs a Fireman

America’s Lender of Last Resort and the World’s Crisis Manager

The collapse of the Twin Towers on September 11, 2001, tore through the infrastructure of Wall Street. Traders’ telephones didn’t work. The wires over which banks sent payments to each other were severed. A bank that processed half of Wall Street’s Treasury bond trades couldn’t confirm what trades had gone through. And the aircraft that shuttled bags of checks between processing centers were grounded. With payments stuck in transit, some banks started to run short on cash while others began to hoard what they had.

Roger Ferguson, the only governor at the Fed that day, issued a statement reminding banks that the Fed was open for business. The following day, banks borrowed $46 billion from the Fed. Where did the Fed get the money? Simple: It printed it. More precisely, it used a few keystrokes and voilà, the money appeared in the banks’ accounts at the Fed. When the damage was repaired and the markets returned to normal, the banks repaid the loans and the money disappeared.

Neat trick, huh? This, however, is not some parlor game. In fact, it is the sort of thing for which the Fed was created—to be the financial system’s lender of last resort. Most of the time, this role is ignored. The crisis of 2008 brought that role back to the limelight with a vengeance, as the Fed worked its magic by lending to commercial banks, investment banks, an insurance company, money market mutual ...

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Publisher Resources

ISBN: 9781118417539Purchase book