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The Problem of Collateral

From Synthetic Assets:

Regulators are failing to distinguish between what is optimal for the individual bank and what is optimal for society.   Liquid assets are supposedly “safe” – but for the problem that liquidity itself is inherently ephemeral.  How precisely do the regulators imagine that collateral posted by a systemically important financial institution (SIFI) is going to protect the lenders?  If the SIFI goes down, there is, in the absence of central bank intervention, a fire sale.

No matter how you slice it, the Fed (or the central bank of your choice) is still the lender of last resort.  For another view on excess reserves, see here.

Posted in Business, Economics.

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