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How Central Banks Use Lender of Last Resort Powers
Description
In this episode, Lucas and Luna dive into the central bank's oldest and most dramatic role: lender of last resort. Using the 2008 rescue of Bear Stearns and the 2023 Silicon Valley Bank failure as anchors, they explain how emergency lending differs from routine open market operations, why stigma still haunts the discount window, and how the Fed's 2023 Bank Term Funding Program broke the old rules. Lucas walks through Walter Bagehot's 19th-century lending principles and shows when central banks follow them—and when they don't. Luna pushes back on moral hazard, asking whether emergency lending rewards risky behavior. The conversation closes with the question every central banker dreads: how do you distinguish a liquidity problem from a solvency problem in real time? A sharp, concrete episode for anyone who wants to understand what 'the Fed backstop' actually means.