The Domestic Lender Of Last Resort

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Chapter 11 The Domestic Lender of Last Resort This chapters focuses on the issues related to a domestic lender of last resort. This chapter further discusses the 'moral hazard ' argument. Although the assertion may have adverse effects on the incentives of investors, it will stop the panic and save the system today. While the idea of the lender of last resort follows an elastic supply of money that expands to meet the demand in panics, the lender of last resort faces the dilemma of timing, amount, recipient and terms. Also, the dilemma about collateral is that its soundness depends on when and whether the panic is stopped; the longer the panic continues, the sharper the decline in the prices of securities and bills of exchanges and commodities. Timing presents a special problem; as the boom mounts to a pinnacle, it must be slowed without the precipitation a panic; after a crash has occurred, it is important to wait long enough for the insolvent firm to fail, but not so long as to let the crisis spread to the solvent firms that need liquidity. Moreover, the dilemmas are more serious with open market operations than with a system of discounts. Thus, given a seizure of credit in the system, the chapter concludes by stating that "more is safer than less since the excess can be mopped up later." Chapter 12 The International Lender of Last Resort This chapter focuses on the role of an international lender of last resort. The primary responsibility of an international lender
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