from a letter to the editor at The WSJ:
What Walter Bagehot Could Teach the Fed
Kudos to Howard Adler for finally stating clearly what few others will: “The Treasury funds its lending by issuing debt, and the Fed purchases that debt by printing money. This expands the supply of money, which is inflationary” (“We Aren’t Ready for a Financial Crisis,” op-ed, Dec. 22).
But he’s wrong on another vital point. Mr. Adler writes, “The central-bank playbook for dealing with a financial crisis was devised in the 19th century by British banker Walter Bagehot. The principal component is to lend freely, which the U.S. government did in response to the pandemic in 2020.” Not exactly. Bagehot and Henry Thornton, 19th-century British authors of modern central banking, posited that a central bank should serve as a lender of last resort.
Further, they argued that central banks should take only good collateral and charge high rates of interest. The point of a lender of last resort isn’t to save everybody but to provide a lifeline to those who were already good financial stewards before the crisis.
The Federal Reserve and other central banks have done the opposite. They take any form of collateral and charge little to no interest, thus prolonging the presence of bloated and ill-managed enterprises, denying savers the benefits of prudence, destroying productivity, and burdening public balance sheets with the debts of functionally dead organizations.
HKO- the cost of cheap money eventually shows how expensive it is.