Subprime crises and Bagehot’s wisdom

Subprime crises and Bagehot’s wisdom: Bagehot, central banking, and the financial crisis,
Xavier Vives, 31 March 2008.

The current crisis is a modern form of a traditional banking crisis. The 125-year-old Bagehot's doctrine tells us how governments should react – lend to solvent but illiquid financial institutions. While easy to state, the doctrine is hard to apply. The key question to assess the future consequences of current central bank policy is whether the subprime mortgage crisis arises in the context of a moderate or a severe underlying moral hazard problem. ..."

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