Solvable From Against The Rules: The Big Short Companion | Lender of Last Resort
Nov 11, 2025
Emi Nakamura, a monetary policy expert from UC Berkeley, dives into the fascinating role of the Federal Reserve during crises. She explains how the Fed was created to prevent banking panics and adapt currency supply. The discussion covers mistakes made during the Great Depression and how the Fed's independence has evolved. Nakamura highlights the intricate relationship between monetary policy and public trust, illustrating how these dynamics played a crucial role in the 2008 financial crisis and what it means for the future.
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Why Central Banks Were Created
- Central banks were born to stop frequent banking crises and to provide an elastic money supply when demand rises.
- Before the Fed, private banks issued their own notes and runs were common because people doubted individual banks' gold backing.
Volcker's High-Rate Gamble
- Paul Volcker deliberately raised short-term interest rates to nearly 20% to crush inflation in the early 1980s.
- Volcker succeeded despite political risk, and the Fed's norm of independence strengthened as a result.
The Fed As The High Priest Of Money
- After Volcker, Fed chairs acquired outsized symbolic authority as guardians of price stability and economic trust.
- That authority became a core reason why markets and politicians deferred to central bankers' judgments.
