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Impact of Financial Markets on Economic Stability and Growth: The Case of Sub-Prime Mortgage Lending - page 32 / 42

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1/23/2015

Jamshid Damooei, PhD

32

The Role of Central Bank (Federal Reserve System)

A Theoretical and Ideological Debate about the Source of the Problem of Unbacked Lending

The contention is that lack of oversight and timely intervention of Central Bank (Federal Reserve System) may enable banks to engage in the reckless expansion of credit that makes this system unstable.

Fed makes sure that banks have enough liquidity and are to a great extent protected through a number means and provisions such as, FDIC insurance, too big to fail, discount window lending, and other emergency help schemes.

Skeptics see the modern banking system as one huge monopoly bank, which is guided and coordinated by the central bank.

Free market advocates follow FIH to the extent that it presents the problem but disagree with its conclusion that Capitalistic economy is inherently unstable.

They put the blame on Central Bank and its intervention in the unrestraint working of the free market.

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