Law Commons^™

The First Year: The Role Of A Modern Lender Of Last Resort, Kathryn Judge

Faculty Scholarship

Insufficient liquidity can trigger fire sales and wreak havoc on a financial system. To address these challenges, the Federal Reserve (the Fed) and other central banks have long had the authority to provide financial institutions liquidity when market-based sources run dry. Yet, liquidity injections sometimes fail to quell market dysfunction. When liquidity shortages persist, they are often symptoms of deeper problems plaguing the financial system.

This Essay shows that continually pumping new liquidity into a financial system in the midst of a persistent liquidity shortage may increase the fragility of the system and, on its own, is unlikely to resolve …