Re-live: Monetary Guardians as Eternal Saviours in Times of Need? Talk Between Joachim Nagel and Moritz Schularick

Taboo in textbooks, now commonplace in practice: when banks and financial markets are in crisis, central banks have become saviours of last resort. But when is such a rescue necessary and when is it not? And doesn’t constant rescuing lead to recklessness on the part of those involved?

We invited Bundesbank President Joachim Nagel to discuss this with the head of the Kiel Institute for the World Economy, Moritz Schularick on January 30. The discussion was moderated by Marlies Uken (ZEIT Online).

Moritz Schularick has shown in a major historical analysis spanning 400 years that central banks cannot avoid interventions. The study suggests that over time, the provision of liquidity during financial turbulence has become the most important driver of balance sheet operations. These lender-of-last-resort interventions have successfully stabilised the economy. At the same time, however, they have increased the probability of future boom-bust episodes. This is because banks that feel safe take more risks (moral hazard).

So what should we do when the next crisis approaches? And what lessons does a practitioner like the head of the Bundesbank learn from experience? This was discussed by Nagel and Schularick yesterday.