We have further learned that, under conditions of great uncertainty, liquidity pressures can erupt in markets that had seldom been affected in the past. Central banks have responded quickly and flexibly to such events, but it has proven difficult to contain the pressures fully. Some quite important questions remain for the longer run, which central banks will be considering.
A second lesson is the difficulty in resolving a problem with an individual institution under strained overall conditions. Bagehot’s formula provides only the most general of guidance; making it operational requires considerable judgement. If and when such an event comes, it tends to have its own unique elements and a particular set of circumstances as backdrop. Speed and flexibility in response are essential.