Viral V. Acharya and Bruce Tuckman write,
Well, heck, I can’t copy/paste from the paper. Anyway, they suggest that when the lender of last resort provides funding to firms with illiquid assets, those firms remain too highly levered and actually increase their risk of default. They mention a number of solutions, but it seems to me that Bagehot had yet another–lend freely, but at a penalty rate. If the lender of last resort charges a high interest rate, then the recipient firms have an incentive to sell assets sooner rather than later.
Sadly, that does not work if they are too big to fail as their asset sales and high interest rates undermine their solvency.
This is part of the government fail of bankruptcy, financial regulation and fiat management.
Fasb made sure it wouldn’t help because right money made sure it was a fire sale.
Tight money that is.
Fiat money is always wrong.