Issue #10: How the Financial System Interacts with the Real Economy

The Evolution of the Federal Reserve and the Short-Term Funding Markets

The age of innocence – when banks lent to each other unsecured for three months or longer at only a small premium to expected policy rates – will not quickly, if ever, return.

— Mervin King, Bank of England Governor, October 21, 2008.

Interest rates are the “beating heart of capitalism” that connects the financial system and the real economy. Despite the …