In fact, it became the largest rehabilitation lender in the country.

The rich rule over the poor. The borrower is servant to the lender.

The rich rule over the poor. The borrower is servant to the lender.

The rich ruleth over the poor, and the borrower is servant to the lender.

The rich ruleth over the poor, and the borrower is servant to the lender.

A certain lender had two debtors. The one owed five hundred denarii, and the other fifty.

A certain lender had two debtors. The one owed five hundred denarii, and the other fifty.

Philosophically, the debt forgiveness approach rests on the belief that creditors share culpability for defaults with debtors, since they made the bad loans in the first place. As long as the borrower has not misled the lender at the time of taking the loan, the lender bears at least some responsibility for the transaction.

Without fundamental changes in its economic growth pattern, it is difficult to imagine how China can become an immature creditor lender and a mature creditor lender. A more likely scenario is that China will continue to have a trade surplus (though much smaller) and an investment income deficit, mirrored by America s trade deficit and investment income surplus.

This, of course, is just the story of subprime mortgages in another guise. The result was increased US spending and the descent of measured household savings into negative territory.

Income inequality grew rapidly in the last decade, but consumption inequality did not. The reason easy credit, especially subprime mortgages, which helped those without means to keep up with the Joneses.

Moreover, because there are no subprime mortgages in China and down payments are as high as 50 60 , even a significant fall in housing prices will not seriously damage China s mega banks.

The Bank of England s charter did not give it the legal authority to undertake such lender of last resort financial stability operations. But the Bank undertook them anyway.

It requires the active involvement of fiscal policymakers. Our current situation requires not a lender of last resort, but a spender of last resort, and that can only be governments.

And essentially the same happened with US subprime mortgage lending and with the Spanish banking system in the 2000 s. In both cases, banks took excessive risks in the expectation eventually vindicated that governments would bail them out.

Heedless of its responsibilities as an emergency lender, it had allowed the banking system to collapse. When financial stability hung in the balance in 1933, the Reserve Banks' failure to cooperate prevented effective action.

Although the Federal Reserve kept interest rates low for a protracted period, the corporate sector did not increase its investment. The recovery was ultimately fueled by so called subprime mortgages home purchase loans extended to borrowers with lower credit ratings.

Regulators primary tool to enforce compliance was their authority to reject non CRA compliant banks requests for new branches or mergers. During the subprime boom, large banks were more likely to want to expand, and thus had greater incentive to comply.

In the old days, when borrowers found it impossible to make their payments, mortgages would be restructured foreclosures were bad for both the borrower and the lender. Securitization made debt restructuring difficult, if not impossible.

What is needed is a financial circuit breaker, in the form of a transitional lender of last resort. This would allow the reform programs to shift the balance of risk back toward the favorable scenario.

A prudent lender should have considered these facts before making the loans. So the banks and international institutions that lent money to Mubarak should bear the responsibility of their choice to bankroll his repressive regime.

Recent experience has provided a harsh reminder of the consequences of neglecting this responsibility. Specifically, the central bank must be ready to act as a lender of last resort when investor panic threatens financial markets.

The Fed, as the de facto global lender of last resort, can improve significantly the effectiveness of Asia s financial safety nets by establishing currency swap arrangements with emerging economies central banks during the policy reversal process.

In August 2007, the decision by BNP Paribas to close two of its hedge funds exposed to the subprime sector precipitated a liquidity crisis for all European banks during that summer. This year, BNP s great rival, Société Générale, has been in the spotlight.

If the problem is excess saving, and if uncertainty erodes confidence, a massive injection of liquidity such as the ECB s in response to the subprime crisis may be necessary but not sufficient. A rate cut also may be required to restore confidence.

While financial institutions tried to mitigate risks by bundling subprime mortgages, Fukushima s cooling system was able to cope with either a blackout and an earthquake or a tsunami. But, in both cases, the failure probabilities were correlated, and their joint occurrence led to catastrophe.

Yes, China is paying a price for aggressive economic stimulus undertaken in the depths of the subprime crisis. The banking system funded the bulk of the additional spending, and thus is exposed to any deterioration in credit quality that may have arisen from such efforts.

As the current crisis has demonstrated yet again, capitalism needs stabilizing arrangements such as a lender of last resort and counter cyclical fiscal policy. In other words, capitalism is not self creating, self sustaining, self regulating, or self stabilizing.

Otherwise, bank runs and debt panics will be rampant. Obstfeld had in mind a bailout mechanism for banks, but it is now abundantly clear that one also needs a lender of last resort and a bankruptcy mechanism for states and municipalities.

The central banker is not only a lender of last resort, but also a speaker of last resort. In both respects, the United States Federal Reserve has fared much better than the European Central Bank in this most recent crisis.

The continent shuts down on the assumption that nothing of consequence will happen until everyone returns, suitably tanned, in September. Never mind the subprime crisis of August 2007 or, closer to home, the European monetary crisis of August 1992 the August holiday is a venerable tradition.

But the minute the sub prime crisis subsides, anxieties about SWF s will return. For the emergence of this vast and growing pool of state controlled funds may have implications more far reaching, and certainly more politically sensitive, than the hopefully temporary distress caused by the subprime crisis.

Unfortunately, the Commission composed mostly of elected officials, rather than experts wasted its time in political squabbles. Its members could not agree even on how to define subprime mortgages and calculate how many such mortgages there were in the United States at the time of the crisis.

Later, their mission was expanded to include the role of lender of last resort. It was not until the excessive inflation of the 1970s that central banks discovered or, in a sense, rediscovered the desirability of keeping the value of money stable.

But the three main British political parties, and the Bank of England, have rejected this. If the Scots want sovereignty, they will need their own currency and their own central bank no British lender of last resort would be available to Scotland s banks.

When the US Federal Reserve was created in 1913, its most important function was to serve as a lender of last resort to troubled banks, providing emergency liquidity via the discount facility. The current crisis suggests that this is no longer enough.

Its members proposed that universal banks be obliged to set up ring fenced retail banking subsidiaries with a much higher share of equity capital. Only the retail subsidiaries would be permitted to rely on the central bank for lender of last resort support.

It was not just Europe that benefited from China s willingness to take on the mantle of lender of last resort. The new found dynamism of African economies is a consequence of the Chinese drive to build up and secure sources of raw materials.

It is no coincidence that the US has not had a 1933 style financial crisis ever since. The financial crisis of 2008 came close, but it was precisely the Fed s readiness to step in as an emergency lender that prevented the worst.

Operationally and financially, the IMF has become much more involved in Europe than its global shareholders deem sustainable. It should become a catalytic lender whose participation in eurozone programs remains desirable but not indispensable giving it the possibility to disagree and walk away.

As the current crisis has demonstrated yet again, capitalism needs stabilizing arrangements such as a lender of last resort and counter cyclical fiscal policy. In other words, capitalism is not self creating, self sustaining, self regulating, or self stabilizing. 160 160 160 160 160

Five years on, the eurozone still lacks a proper banking union, or even, as Greece demonstrated, a proper lender of last resort. Moreover, a higher inflation target remains unthinkable, and the German government argues that defaults on sovereign debt are illegal within the eurozone.

The essence of a central bank s lender of last resort function has traditionally been the provision of unlimited funds. Because there is no limit on the amount of dollars that the Fed can create, no market participant can take a speculative position against it.

But, in both cases, the lender was distant and anonymous. American mortgages were no longer held at the local bank, but had been repackaged in esoteric financial instruments and sold around the world likewise, Greek government debt is in large part owed to foreigners.

National governments vulnerability to the financial markets and their exaggerated interest rates must be reduced. Only the ECB, by taking on the role of lender of last resort, can stop the eurozone s capital outflow and restore confidence in Europe s capacity to solve its own problems.