There’s one last quote from Lombard Street that I want to record. In reference to the Bank of England’s lender of last resort activities, Bagehot writes:
No advances indeed need to made by which the Bank will ultimately lose. The amount of bad business in commercial countries is an infinitesimal small fraction of the whole business. That in a panic the bank, or banks, holding the ultimate reserve should refuse bad bills or bad securities will not make the panic really worse; the ‘unsound’ people are a feeble minority, and they are afraid even to look frightened for fear their unsoundness may be detected.
Is anybody else wondering whether it’s still true that: “the amount of bad business in commercial countries is an infinitesimal small fraction of the whole”?
(cross posted here)
Synthetic Assets 