Originally published to The Society of Professional Economists | June 16, 2011
Titles of books are funny things. In theory, they succinctly convey the content. Yet in the case of Perry Mehrling’s latest book, The New Lombard Street: How the Fed Became the Dealer of Last Resort, the title doesn’t quite do the content justice. To be sure, Mehrling comprehensively reviews how the Fed responded to the financial crisis by expanding its remit beyond lender of last resort to a liquidity supplier for a myriad of financial institutions, across capital markets as well as national borders. In doing so, Mehrling does not only describe how the Fed’s operations and tools changed. Even more, he deftly traces the conceptual origins of the Fed’s crisis response through its own history, as well as back to the guiding principles of nineteenth-century central banking as articulated by Walter Bagehot and practised by the Bank of England.
That analysis alone would deserve praise, particularly in such a slender volume. But even more impressive – and not adequately foreshadowed in the book’s title – are Mehrling’s insights into the origins of the financial crisis. In ways few observers have dared, Mehrling identifies the origins of the crisis in the flawed assumptions of post-war macroeconomic, monetary and finance theory. With an economy of language and free of jargon, Mehrling moves easily between the disciplines of economics and finance, zeroing in on the critical assumptions that market participants and central bankers ignored, ultimately at extraordinary cost to themselves and society at large. Continue Reading.
