Dear Sirs:
I read with interest Mark A. Calabria’s detailed recommendations for bank reform titled “An End to Bailouts”. Unfortunately, it is the nature of man to use a power that he possesses; therefore, eventually all the powers stripped from the Fed will slowly be returned, probably due to so-called “crisis management”. But, let us assume that the Fed’s powers were scaled back to those recommended by Walter Bagehot’ i. e., “Lend without limit, to solvent firms, against good collateral, at ‘high rates’.” Why is a central bank required to perform this function? If a bank is fundamentally sound, yet short of liquid funds, it has no problem borrowing short term from other banks. The Fed’s vaunted discount window power is used soley to bail out banks that are NOT fundamentally sound. As long as the Fed possesses the power to lend to unsound banks, it WILL lend to unsound banks, because the political pressure not to do so will be irresistible. Better to “End the Fed” now. There is no reason to reform it, and there is no possibility that reform will last.
Patrick Barron
