Discuss whether a large private organization could function in the role of a lender of last resort, and if it could, what potential problem(s) might arise.
What will be an ideal response?
A private organization could function in the role of a lender of last resort, and prior to the creation of the Fed a few tried. There are a couple of potential problems that come to mind. First, any private organization that would serve this role would have to have significant financial wherewithal which means they are likely to have significant monopoly power, and monopoly power in the hands of a private firm is seldom efficient. Second, a private firm acting in this role would certainly have potential conflict of interest issues. Do they loan to everyone, or to just anyone that may not be a potential threat to them? How do they determine which criteria to use in deciding who does or doesn't obtain a loan? Finally, and perhaps the largest problem, while a private organization might have the wherewithal to manage the failure of a single institution, it is very unlikely to have the resources to stem a financial panic. Only the central bank, with its ability to issue currency and reserves in unlimited amounts can credibly stop a system-wide collapse.
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