[![Alt-M: Ideas for an alternative monetary future](/build/cato_2020/images/alt-m.svg)](/alt-m) December 15, 2015 10:47AM # George Selgin Talks Crisis on EconTalk By Tom Clougherty --- SHARE ![Bagehot, George Selgin, Ben Bernanke, government bailouts, lender of last resort](/sites/cato.org/files/styles/pubs_2x/public/wp-content/uploads/2015/12/1024px-Day_40_Occupy_Wall_Street_October_25_2011_Shankbone_13-4.jpg?itok=JJMOP5j5) CMFA Director George Selgin recently [appeared](http://www.econtalk.org/archives/2015/12/george_selgin_o.html) on EconTalk, the weekly podcast from the Library for Economics and Liberty hosted by Russ Roberts. He and Russ discussed the causes of the 2007-08 financial crisis and the Fed’s response to it, with George drawing on his *Alt‑M* reviews (see [here](https://www.alt-m.org/2015/10/31/courage-to-refuse/) and [here](https://www.alt-m.org/2015/12/04/sterilization-fed-style/)) of Ben Bernanke’s, [*The Courage to Act*](http://www.amazon.com/The-Courage-Act-Memoir-Aftermath/dp/039324721X). George and Russ begin by discussing the moral-hazard consequences of the Fed’s emergency lending during the crisis. While the roots of the moral hazard problem are traceable to the introduction of state-level and then nationwide deposit insurance schemes, George pointed out that the problem became much worse once the 1984 rescue of Continental Illinois established a precedent for bailing out “too-big-to-fail” financial institutions. George and Russ then turn to the Fed’s response to the crisis. First, George points out that the Fed’s emergency lending violated the famous “lender of last resort” rules laid out by Walter Bagehot, namely that central banks should only lend to *solvent* banks in need of liquidity, and then only at a *high rate* and against *good collateral*. In the cases of Bear Stearns, AIG, and Citigroup, however, the Fed went beyond providing liquidity to sound firms—these were bailouts, plain and simple. Second, George argues that the Fed made a catastrophic mistake by sterilizing its early emergency lending—that is, by selling off its Treasury securities so that neither its balance sheet, nor the overall supply of credit, would expand—and by paying interest on bank reserves beginning October 2008. As George explains in detail [here](https://www.alt-m.org/2015/12/04/sterilization-fed-style/), both moves show that Bernanke and other Fed officials were more concerned with maintaining their target for the federal funds rate than they were with offsetting collapses in lending and spending. The entire conversation, which provides a good summary of George’s views on the financial crisis and the Fed’s response to it, can be found [here](http://www.econtalk.org/archives/2015/12/george_selgin_o.html). Enjoy! ##### Disclaimer This post was originally published at Alt‑M.org. The views and opinions expressed here are those of the author(s) and do not necessarily reflect the official policy or position of the Cato Institute. Any views or opinions are not intended to malign, defame, or insult any group, club, organization, company, or individual. All content provided on this blog is for informational purposes only. The Cato Institute makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. Cato Institute, as a publisher of this article, shall not be liable for any misrepresentations, errors or omissions in this content nor for the unavailability of this information. By reading this article and/​or using the content, you agree that Cato Institute shall not be liable for any losses, injuries, or damages from the display or use of this content. ##### Related Tags [Monetary Policy](https://www.cato.org/monetary-policy), [Alt-M](https://www.cato.org/alt-m), [Center for Monetary and Financial Alternatives](https://www.cato.org/center-monetary-financial-alternatives) [![Creative Commons License](/build/cato_2020/images/creative-commons.svg)](http://creativecommons.org/licenses/by-nc-sa/4.0/) This work is licensed under a [Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License](https://creativecommons.org/licenses/by-nc-sa/4.0/).