Lender of Last Resort Function of Central Banks

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In the United States, the Federal Reserve serves as the lender of last resort to those institutions that cannot obtain credit elsewhere and the collapse of which would have serious implications on the economy. The collapse of many financial institutions in recent years, along with the collapse of Structures Investment Vehicles (SIV) and Mortgage-Related Securities has triggered Central Banks role as the lender of last resort around the globe, the capstone to uphold the financial markets. Under the midst of a seemly unending liquidity crisis, the Financial Times editorial of September 18, 2008 stated, “nobody trusts any credit, other than that of the government themselves.” The world’s financial system is experiencing devastating losses from the current financial crisis and it is on the government’s creditworthiness that citizens, investors and the economy as a whole are relying on. The current crisis has uncovered flaws in the financial markets, which have made many Americans blamed insufficient or even poor regulation to effectively watch excessive risk. Truthfully a price will have to be paid after using taxpayer’s money to save the financial markets from failing, and that will be a transformed and tighter financial regulation system (Editorial in the Financial Times). Irresponsible financiers, excessive risk taking while investing in complex security, and regulatory reforms for “credit default swap (CDS), for example, is likely to face more scrutiny” (Tett, 2008), along with mark-to-market accounting which had been held responsible for using flawed sources of valuation hurting bank’s capital base. The problems in our financial system and our currency are enough reasons to “make the job of rescuing the financial system even more difficult” (Editorial in Financial Times, 2008), even so the tremendous uncertainty of investor’s who are still wondering whether the means to address the problem can sustain the enormous complexity of the financial instruments...
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