* In 1907 the bank failures start with Knickerbocker Trust Company(KTC)
* JP Morgan does not entertain to save KTC
* This starts a whole wave of bank failures threatening JP Morgan's own assets also.
* A need to have a bank for all the banks is sought by one and all
* In 1913, Federal Reserve is commissioned as a 12 member bank system
* They had certain tools to use for monetary policy like increase discount rate etc.
* In 1929, the banks start to fail again. Foreigners start leaving US with their gold
* Fed is panicky and starts raising discount rate to avoid gold outflow
* This has a spiral effect of worsening the money supply and more bank failures result
* So you could say that the Fed failed in its very first assignment
* However it gave the Fed more insight on how to prevent such runs later.
* May be the Bear Stearns bank failure in 2008 was prevented from becoming a 1929 kind of disaster by the Fed. Who knows?
No comments:
Post a Comment