Senators Elizabeth Warren and David Vitter have proposed legislation that would seriously restrict the Federal Reserve’s ability to provide emergency lending during a crisis, and former Fed chief Ben Bernanke has called them out for a dangerous solution to a legitimate problem. “Their approach is roughly equivalent to shutting down the fire department to encourage fire safety; or—more relevant to the current context—eliminating deposit insurance so that banks will be more careful. Rather than eliminating the fire department, it’s better to toughen the fire code,” Bernanke writes on his Brookings Institution blog. Stigma trumps Bagehot’s Dictum, argues Bernanke The classic…
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