The current crisis is a modern form of a traditional banking crisis. The 125-year-old Bagehot's doctrine tells us how governments should react – lend to solvent but illiquid financial institutions. While easy to state, the doctrine is hard to apply. The key question to assess the future consequences of current central bank policy is whether the subprime mortgage crisis arises in the context of a moderate or a severe underlying moral hazard problem.

Lender of Last Resort interventions aren’t working. It is time for more radical thinking. This column argues for the creation of a “Emergency Bank Debt Insurance Mechanism” that would go beyond Lender of Last Resort interventions. It would short-circuit the panic logic by temporarily providing full coverage to any short-term lending explicitly supported by the insurer.

The UK Treasury Committee recently released a report on the lessons from the plight of Northern Rock. In the first of a two-column series, Willem Buiter analyses the shortcomings of the report’s recommendations for reducing problems in the banking and ‘shadow banking’ sectors.

The Subprime troubles caused a liquidity shock, but there is little reason to believe that a substantial decline in credit supply under the current circumstances will magnify the shocks and turn them into a recession. We have not (yet) arrived at a Minsky moment.

Uneven supervision gave an edge to risk takers in some nations on the up side, but the pain is being felt all around Europe on the downside. To avoid future crises, all mortgage originators should be regulated, banks should have to retain their “equity” or first loss risk, the rating agencies should be more transparent and independent, and Europe’s coordination failure among national supervisors should be fixed.

More liquidity is good for entrepreneurs, but not always. New empirical analysis gives evidence on a hypothesis formulated by Adam Smith and suggests directions for policy discussions.

Public interventions are bad except when there is a well-identified market failure. Since early August, we have witnessed a massive market failure due to acute information asymmetry. Intervention should directly address the failure, but that’s not possible this time, so we have the second-best solution. Why is it that a second-best solution is better than none?