Establishing the Fed worsened the Great Depression – St Louis Fed paper
Setting up lender of last resort reduced banks’ incentive to manage risk, paper argues
Establishing the Federal Reserve weakened the incentives for banks to guard against systemic risk and worsened the Great Depression, a research paper published by the St Louis Fed argues.
“Systemically important banks acted as though they expected the Fed to provide liquidity risk insurance that had not existed before the Fed’s founding,” write Charles Calomiris, Matthew Jamerski and David Wheelock.
The authors use data on interbank connections and bank balance sheets from 1910–29 to examine
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