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Why would advocates of free banking claim that there is no need in the Lender of...

Why would advocates of free banking claim that there is no need in the Lender of Last Resort? Do you agree with them?

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Expert Solution

Those who support free banking advocates that there is no need for lender of Last resort because lender of last resort generally means Central Bank of country which is there to bail out other commercial banks, when they are in financial distress.

The advocates of free banking says that there should be no intervention from the central bank and they should not be there to support commercial banks into getting bailed out at unfavourable situations.Central bank should not act as a lender of Last resort to the commercial bank because that hampers the free Banking claim.

They advocate that Central Bank acting as a lender of Last resort introduces a lot of moral hazards into the overall banking system,because when commercial banks feels that Central Government would act as a support for them at the time of financial distress, it would knowingly take excessive risks and it would try to make excessive profits through taking unnecessary risk and that will put the clients and other stakeholders in danger. So it is advocated that for elimination of moral hazard like excessive risk taking, it is always advisable that Central banks should not act as a lender of last resort.

jeff jeffy answered 2 years ago
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