Professor Bainbridge...on law, politics, religion, culture & food

An Alternative to a Fed Bailout

In a short and highly accessible essay, Professor Steven Schwarcz argues that the “subprime mortgage crisis is undermining financial market stability and has the potential to cause a true systemic breakdown.” As a long term solution, he proposes not a Fed bailout but creation of “a governmental liquidity provider of last resort.”

By advertising its willingness to purchase securities in panicked markets and, when necessary, actually purchasing such securities, such a liquidity provider can reduce doubt over future market liquidity, thereby avoiding a stampede to sell and the resulting vicious cycle of plummeting prices.

It would be well if policymakers were to take 15 minutes to give it a read before rushing off to adopt other fixes.