What is remarkable is that the strategy of dumping credit on the world’s banks as organized and celebrated by Paulson, Geithner and Summers in the crisis of 2007-8 (Becker and Morgenstern, 2009), is the program for crises devised and recommended 134 years ago by Walter Bagehot (1873). There was nothing new in their plan, the idea was to dump so much money on the markets that prices would stabilize and the banks recover under the weight of the liquidity. See page 24, section 2 of chapter 2 of Bagehot.
Bagehot's dictum was to lend freely against good collateral at a high rate. There was much about the policy interventions in 2008 that either ignored part of this dictum (the high rate, for example, since rates went to zero and even negative in some countries) and the interventions were too slow at times. So, for example, in the case of the U.K. the Bank of England at first declined to add sufficient funds to hit its interest rate target. The regulatory structure in the U.S. made it very difficult for the Fed to lend to where it was needed. The Fed, Treasury and FDIC went beyond Bagehot's dictum by providing capital (via TARP injections) and guaranteeing bank debt (via the FDIC). The good collateral part is interesting because the assets that the Fed took via Maiden Lane I (Bear Stearns), II and III (AIG) were all money good but in this case they did not just lend against the collateral but essentially bought it. Bagehot remains an excellent read, however, and I fear that the move to make banks hold vast amounts of High Quality Liquid Assets to deal with a 30-day run in an adverse scenario ignores his insights.
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