This preview shows page 1. Sign up to view the full content.
Unformatted text preview: ount as part of Friedman and Schwartz’s measure of the
money supply. Under a classic monetarist view, the failure of such institutions
should pose no threat to the aggregate economy. (Hence the proposals by some
that finance can remain only lightly regulated, as long as commercial banks are
strictly excluded from the riskier activities.) But the consequences of the failure
of Lehman suggest otherwise.
Models of the Bank Lending Channel
Models that postulate an essential role for banks in financing certain kinds of
expenditure are better able to explain how a financial crisis could have such dire consequences
quences for the real economy as we have observed. However, the kinds of financial
constraints that were emphasized in many past models of this kind assumed specific
institutional forms and regulatory requirements that have become less relevant to the
U.S. financial system over time.
Consider, for example, traditional accounts of the “bank lending channel” of
the transmission of monetary policy. This argument emphasized the indispensable
role of commercial banks as sources of credit for certain kinds...
View Full Document