The lender of last resort is a critical function of the US Federal Reserve. This mechanism is employed in times of crisis to stabilize economic conditions, provide capital to creditors (on debtors behalf), prevent bank runs and minimize adverse reactions by markets when it is needed most. During the recent financial crisis, the Fed provided lender of last resort facilities to a myriad of institutions, banks, foreign governments, corporations, commercial paper markets and the like in effort to stabilize the liquidity crunch as the market raced to the bottom in the price of credit.
With open market operations and asset purchases (QE), the Fed essentially created its own jurisdiction in a way that is analogous to the Supreme Court's use of judicial review in Marbury v. Madison. In the historic ruling, Chief Justice John Marshall granted the Supreme Court the power of judicial review. Today, this power is assumed and taken for granted. However, it was the Marbury case that set the precedent of the Supreme Court's ability to review matters of Constitutional debate. Without this ruling, the power and jurisdiction of the court is questionable at best.
The ECB has not had a Marbury v. Madison -- they do not have the ability to review budgetary measures by member nations. The leadership of the ECB has not established sufficient credibility to serve the lender of last resort function in the market system. Mr. Draghi was able to implement Outright Monetary Transactions (QE), albeit 4 years late. He and ECB leadership must get creative (and timely) with policy tools to handle the recent Greek crisis. If they are better off without Greece as a member, the leadership ought to set the stage and organize an orderly exit. Additionally, measures to prevent the run on the Eurozone from extending to other members is vital for the currency survival. Perhaps, it would be best to start with an accommodating monetary policy in times of crisis -- less you wish to experience self perpetuating crises.
The first rule is do no harm -- the Europeans take this a little too literally. Hence the four years it takes to implement a single policy.
If the ECB wants more power it may be best to just take it. Time is of the essence.
References:
With open market operations and asset purchases (QE), the Fed essentially created its own jurisdiction in a way that is analogous to the Supreme Court's use of judicial review in Marbury v. Madison. In the historic ruling, Chief Justice John Marshall granted the Supreme Court the power of judicial review. Today, this power is assumed and taken for granted. However, it was the Marbury case that set the precedent of the Supreme Court's ability to review matters of Constitutional debate. Without this ruling, the power and jurisdiction of the court is questionable at best.
The ECB has not had a Marbury v. Madison -- they do not have the ability to review budgetary measures by member nations. The leadership of the ECB has not established sufficient credibility to serve the lender of last resort function in the market system. Mr. Draghi was able to implement Outright Monetary Transactions (QE), albeit 4 years late. He and ECB leadership must get creative (and timely) with policy tools to handle the recent Greek crisis. If they are better off without Greece as a member, the leadership ought to set the stage and organize an orderly exit. Additionally, measures to prevent the run on the Eurozone from extending to other members is vital for the currency survival. Perhaps, it would be best to start with an accommodating monetary policy in times of crisis -- less you wish to experience self perpetuating crises.
The first rule is do no harm -- the Europeans take this a little too literally. Hence the four years it takes to implement a single policy.
If the ECB wants more power it may be best to just take it. Time is of the essence.
References:
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