Wall Street Journal

In "Why Do We Have a Central Bank?" (op-ed, Dec. 3), Gerald O'Driscoll Jr. states that "there is no agreement on why the institution exists." Anyone still confused about the purpose and value of a central bank should peruse the information provided on the Federal Reserve's website regarding the more than 21,000 individual credit and other transactions, amounting to $3.3 trillion, conducted by the Fed to stabilize the capital markets during the recent financial crisis. The report reveals in breathtaking clarity how broad, complex and severe the crisis actually was, and the stunning resourcefulness with which the Fed successfully fought the spreading panic. One is left to wonder in morbid fascination where the nation's economy would be today had the Fed either not used its unique firepower to the extent it did, or if the central bank had not existed.

Mr. O'Driscoll correctly observes that the Federal Reserve's inaction during the Great Depression "was disastrous," but then criticizes Ben Bernanke and his colleagues for acting swiftly and decisively to prevent a second Great Depression.

Mr. O'Driscoll also errs when he characterizes the Fed's lender-of-last-resort function as "surreptitious bailouts of large banks." A bailout is propping up a failing—that is, insolvent—institution. By stark contrast, lending by way of the discount window and the various emergency credit facilities established during the crisis was short-term (usually overnight) assistance to solvent institutions experiencing temporary liquidity difficulties because the interbank credit market had collapsed. The Fed's lender-of-last-resort function is a critically important and perfectly legitimate aspect of its duties as the central bank—conducted under very strictly defined terms, on a short-term basis, fully collateralized, with the collateral steeply discounted. The Fed has never lost a dime by way of such lending. Any restriction of this aspect of the Fed's powers would be to put the flexibility, resilience, and stability of the financial system—and therefore the broader economy—at much greater risk.

John R. Dearie

The Financial Services Forum

Washington