Furthermore, the vantage point of crisis prevention is just as important as crisis response. One difficult issue here is that the existence of an LLR, and the growing role that central banks’ LLR function has come to play, could encourage excessive risk-taking by market participants; in other words, the issue of moral hazard needs to be taken into account.
On the other hand, the estimated impact on the economy could be too low. As I have discussed, the disruption to the financial system is far broader than just to leveraged institutions. To the extent that the meltdown in the mortgage market has revealed even deeper problems in the financial system, the negative impact on economic activity could be even larger.