what might be at first sight supposed, the best [ policy ]... to deal with a drain arising from internal discredit, is to lend freely. the first instinct of everyone is the contrary. there being a large demand on a fund which you want to preserve, the most obvious way to preserve it is to hoard it – to get in as much as you can, and to let nothing go out which you can help. but every banker knows that this is not the way to diminish discredit. this discredit means, " an opinion that you have not got any money ", and to dissipate that opinion, you must, if possible, show that you have money : you must employ it for the public benefit in order that the public may know that you have it. the time for economy and for accumulation is before. a good banker will have accumulated in ordinary times the reserve he is to make use of in extraordinary times. ( p. 24 ) and what are the terms at which the central bank should lend freely? bagehot argues that " these loans should only be made at a very high rate of interest " ( p. 99 ). some modern commentators have rationalized bagehot's dictum to lend at a high or " penalty " rate as a way to mitigate moral hazard – that is, to help maintain incentives for private - sector banks to provide for adequate liquidity in advance of any crisis. i will return to the issue of moral hazard later. but it is worth pointing out briefly that, in fact, the risk of moral hazard did not appear to be bagehot's principal motivation for recommending a high rate ; rather, he saw it as a tool to dissuade unnecessary borrowing and thus to help protect the bank of england's own finite store of liquid assets. 3 today, potential limitations on the central bank's lending capacity are not nearly so pressing an issue as in bagehot's time, when the central bank's ability to provide liquidity was far more tenuous. bagehot defined a financial crisis largely in terms of a banking panic – that is, a situation in which depositors rapidly and simultaneously attempt to withdraw funds from their bank accounts. in the 19th century, such panics were a lethal threat for banks that were financing long - term loans with demand deposits that could be called at any time. in modern financial such a circumstance could arise in

at the same time, because i appreciate the role of chance and contingency in human events, i try to be appropriately realistic about my own capabilities. i know there is much that i don't know. i consequently try to be attentive to all points of view, to work collaboratively, and to involve as many smart people in policy decisions as possible. fortunately, my colleagues and the staff at the federal reserve are outstanding. and indeed, many of them have demonstrated their own breadth and flexibility, moving well beyond their previous training and experience to tackle a wide range of novel and daunting issues, usually with great success. law is like economics in that, although it has its own esoterica known only to initiates, it is at bottom a craft whose value lies primarily in its practical application. you cannot know today what problems or challenges you will face in the course of your professional lives. thus, i hope that, even as you continue to acquire expertise in specific and sometimes narrow aspects of the law, you will continue to maintain a broad perspective and willingness, indeed an eagerness, to expand the range of your knowledge and experience. i have spoken a bit about the economic and financial challenges that we face. how do these challenges bear on the prospects of the graduates of 2009? the economic situation is a trying one, as you know. we are in a recession, and the labor market is weak. many of you may not have gotten the job you wanted ; some may have had offers rescinded or the start of employment delayed. i do not minimize those constraints and disappointments in any way. restoring economic prosperity and maximizing economic opportunity are the central focus of our efforts at the fed. nevertheless, you are in some ways very lucky. you have been trained in a field, law, that is exceptionally broad in its compass. at the federal reserve, lawyers are involved in every aspect of our policies and operations – not just because they know the legal niceties, but because they possess analytical tools that bear on almost any problem. in law school you have honed your skills in reasoning, reading, and writing. many of you have work experience or bring backgrounds to bear ranging from history to political science to the humanities to science. there will always be a need for people with your abilities and talents. so, my advice to you is to stay optimistic. things usually have a way of working out. my second piece of advice is to be flexible, even adventurous