How the U.S. Federal Reserve began actively intervening in marketsWalter Bagehot's Lombard Street, published in 1873 in the wake of a devastating London bank collapse, explained in clear and straightforward terms why central banks must serve as the lender of last resort to ensure liquidity in a faltering credit system. Bagehot's book set down the principles that helped define the role of modern central banks, particularly in times of crisis-but the recent global financial meltdown has posed unforeseen challenges. The New Lombard Street lays out the innovative principles needed to address the instability of today's markets and to rebuild our financial system.Revealing how we arrived at the current crisis, Perry Mehrling traces the evolution of ideas and institutions in the American banking system since the establishment of the Federal Reserve in 1913. He explains how the Fed took classic central banking wisdom from Britain and Europe and adapted it to America's unique and considerably more volatile financial conditions. Mehrling demonstrates how the Fed increasingly found itself serving as the dealer of last resort to ensure the liquidity of securities markets-most dramatically amid the recent financial crisis. Now, as fallout from the crisis forces the Fed to adapt in unprecedented ways, new principles are needed to guide it. In The New Lombard Street, Mehrling persuasively argues for a return to the classic central bankers' "money view," which looks to the money market to assess risk and restore faith in our financial system.

Acknowledgments xiIntroduction 1 A Money View Perspective 2
Lessons from the Crisis 6


Chapter One: Lombard Street, Old and New 11
The Inherent Instability of Credit 12
The Old Lombard Street 18
The New Lombard Street 23


Chapter Two: Origins of the Present System 30
From National Banking to the Fed 30
From War Finance to Catastrophe 37
Noncommercial Credit in Depression and War 43


Chapter Three: The Age of Management 48
Monetary Policy and the Employment Act 52
Listening to the Academics 57
Monetary Walrasianism 60
A Dissenting View 65


Chapter Four: The Art of the Swap 71
Currency Swaps and the UIP Norm 72
Brave New World 79
From Modern Finance to Modern Macroeconomics 85


Chapter Five: What Do Dealers Do? 92
Inside the Money Market 93
Funding Liquidity and Market Liquidity 98
Anatomy of a Crisis 103
Monetary Policy 107


Chapter Six: Learning from the Crisis 113
The Long Shadow of Jimmy Stewart 116
A Stress Test of Moulton-Martin 123
Dealer of Last Resort 132


Conclusion 136
Notes 141
References 149
Index 159