Question

Do you agree with the Fed loaning money to financial institutions that are solvent, but illiquid? Do you agree with the Fed loaning money to financial institutions who are insolvent? Why or why not?

Answer 1

Ans

I agree with fed lending money to solvent banks who are illiquid because there problem is in shortrun. In long run they can easily become liquid because fundamentals are enough strong. Fed as central bank should always provide liquidity in emergency. This is why a central bank is required in the first place

I do not agree with loaning to insolvent banks. They are not healthy and they are generally careless. They are fundamentally weak. In such situation fed loaning then is tantamount to setting a bad example of rescuing irresponsible institutions.