During the Depression, the basic elements for the prevention of banking panics were put in place or strengthened: an extensive and well-designed system of federal deposit insurance, broad access by banks to the discount window, and sound supervision of banks.2 After 1933, the United States did not experience another major broad financial crisis for 74 years, until 2007. Even through significant macroeconomic upheavals, and the savings and loan crisis of the 1980s, the Continental Illinois failure in 1984, the Long-Term Capital Management crisis of 1998, and the dot-com crash in the early 2000s, a widespread financial crisis did not occur. Although the savings and loan crisis was very costly to taxpayers, for the  1  Franklin Delano Roosevelt, “Fireside Chat on Banking,” March 12, 1933. Transcript available from University of California, Santa Barbara, American Presidency Project, http://www.presidency.ucsb.edu/ws/?pid=14540. 2  Congress greatly broadened the lending powers of the Federal Reserve Banks in 1932 and again in 1933. The Federal Deposit Insurance Corporation was created in 1933. See Meltzer (2003) and Sastry (forthcoming). BIS central bankers’ speeches  1  most part the system of deposit insurance, discount window access, and supervision prevented runs and large spillovers into the real economy. The bank runs during the Great Depression have been the subject of extensive research. Economic theory provided increasingly compelling explanations for the mechanisms that lead to bank runs. The widely cited work by Douglas Diamond and Philip Dybvig in 1983 explained the economic logic behind why banks exist and what makes them vulnerable to runs.

Finally, the procyclical leverage of financial intermediaries is tied to systemic risk, suggesting that the leverage of financial intermediaries is a key factor behind economy-wide financial crises. Once again, a potential “macroprudential” regulator – one that is attempting to reduce the risk of a financial crisis but also attempting to stabilize the macroeconomy – would face a risk-return tradeoff: Allowing a buildup in financial intermediary leverage as the economy grows can assist in achieving macroeconomic objectives such as full employment, but risks a more severe downturn if such leverage growth becomes excessive. Making those judgments is inherently difficult. The benefit of being a money issuer Society demands money for many purposes. Money provides a good way for people to store value safely, and it can be used as a means of exchange. These are classic and enduring features of money. For the purpose of this talk, by “money” I mean a broad definition of money – what some would call “money-like” assets that can provide the monetary functions of storing value and serving as a medium of exchange. Those include both short-term government debt and short-term borrowing by financial intermediaries, especially borrowing that is designed to be extremely safe, such as repurchase agreements, or repos. A repo is a fairly modern instrument that I’ll describe in a bit more detail, as repos played an important role in the buildup of intermediary leverage and the issuance of private-sector money-like instruments during the lead-up to the crisis of 2007–09.