Federal Reserve: Lender of Last Resort
The Federal Reserve is a lender of last resort set up after financial crises in the United States seemed to motivate the need for someone who could print money and lend money to other institutions as a last resort. The Federal Reserve maintains accounts for member banks to which it gives credits which are used to count towards reserve requirements in fractional reserve banking. The member banks may also borrow at the Fed at the discount window. The Fed sets a rate at the discount window and also influences interest rates in the market through open market operations when it directly buys bonds from or sell bonds into the economy, soaking up liquidity or giving out cash. In other words, because the Fed has cash outside the economy, it can deliver the cash into the economy by lending it effectively by buying bonds and that lowers the interest rate because of the demand generated for bonds. If there is a currency crisis such that debt in dollars cannot be repaid, then bonds denominated in dollars may plunge in value taking the USA dollar value down with it, and at that point rates would sky rocket and the Federal Reserve would manage the rates down by becoming a lender of last resort. The Federal Reserve for an individual is not unlike one’s family, where one wouldn’t get a loan from one’s family except as a last resort and the individual normally wouldn’t experience a financial crisis with his employer or a foreign currency crisis among his colleagues who all use the same currency and reside in the same country. But anything may happen. For example, if your employer goes bankrupt that is akin to a financial crisis and your family may need to bail you out by crediting you with some income for you to reconstruct your career at a new employer. That credit is generated out of the blue but your work is real. A currency crisis would be if your girlfriend breaks off an engagement with you and you are left with a lot of her ideas with no way to convert them to any currency of use. Other people who you owe money to or who are simply owed money denominated in currency based off of your currency may panic and rates would rise while your family takes you in and normalizes rates by lending as a last resort to you until you can float your currency in the market again by selling your ideas as a book for example. When you have two nations, for instance, the United Kingdom and the United States work towards merging, we recognize that there will be difficulties. I am United States but I played as United Kingdom to deal with problems in World War 2, and Canada to deal with problems in World War 1. I am a Canadian citizen which explains the latter. But what explains the former? When I was in Canada, I was raised by United Empire Loyalists in Ontario. So we see in the course of human affairs as the Declaration of Independence writes, things are often muddled, but at least we can address the Irish question. Ireland was fighting alongside the British Commonwealth and was enthralled by British and then Canadian. Then she would like Australian but she would ask why the accent was American, expecting the dream to be over. The answer isn’t that I’m both American and British: in this way I’m only British and Canadian. The answer was I picked up the American accent going into America to fight their wars for them as I liked an American girl but then I almost fell in love with a French girl and decided I was what I earned as respect is earned. Welcome back Ireland as the only reason you went missing for a while is because Canada couldn’t even set out on a straight offensive without confusing honest and heart economics with love ballads made in America. Americans march beside you and you may not always see them, the strongest among them may not wear a crown. British proudly she sings, looking over her sea. And from days of yore from Britain’s shore, the maple leaf forever for Canada. Seas between us brai’d have roared, has your heart gone so cold my dear that you have forgotten days of auld Lang syne, Ireland of green gables, your homework is neater than mine. It is more important you set a beautiful thing back to her rightful place than to worry about her journey getting there or back. I stick to my choice of Ireland, life and empire.