There’s still a widespread belief that the federal government will bail out large financial firms if there’s another crisis. Curbing the Federal Reserve’s ability to spread money around would be a great way to lower the chances of future bailouts. So it’s encouraging to learn that Senators Elizabeth Warren (D-Mass.) and David Vitter (R-La.) have joined forces in an effort to “further curb” the Fed’s ability to make so-called emergency loans.
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The most fundamental of the Federal Reserve System’s many responsibilities is that of serving as the U.S. financial markets’ ultimate source of liquidity. Federal Reserve notes, along with account balances held by private depository institutions at the various Fed banks, are the U.S. economy’s final means of payment, and hence its most liquid assets, the scarcity of which is a crucial determinant of the scarcity of other liquid assets.