ABSTRACT
The financial system evolved and became so complex that financial intermediaries proved incapable or unwilling to properly monitor, measure, and manage risks. It eventually became apparent that prominent financial institutions did not devote a lot of resources to risk management; as such, they were ill-equipped to estimate the effects of a 20 percent drop in house prices. The chapter discusses the causes of panics and the interventions of central banks to restore stability. It also discusses that the concept of a central bank was in flux, the vitality of its existence became political, and that the Bank of England was restrained as a guarantor of the provision of liquidity. The chapter addresses the question: Was the Bank of England actually hamstrung at a time of grave financial peril? It focuses on the 2008 crisis in the context of credit easing and Bagehot's proposition.
