1) Why didn't it happen after the Bear stearns bust then? The banks had simular balance sheets, the only diffrence is the saving.
2) Ok lets asume your right:
Im against a fed in general but acting as a lender of last resort is the one of the few valid things the should do (sometimes). The problem is that the lender of last reserve thing is for banks that still are liquid and just need some cash now. A lot of banks like Lehman and other weren't liquid anymore and in that case its not really lending its more saving them. Banks that violate the golden rule of banking (lending long, borrowing short) should not get these kinds of lendings. The plaid at there own risk with ful knowlage what the do. Capitalism puniches this kind of stuff and acts as a filter. If no bank ever goes bust the banking sector will be much bigger then it normaly would (missalocation of resources).
Little extra note: Lending as last reserve should be done with high rates (if a bank really only needs it to guard agains the run the can afford it) the fed just floded the banking sector with cheap money. Thats quite diffrent then beeing lender of last reserve.
1. It didn't happen with Bear Sterns because the street didn't believe, yet, that Bear going down would take down the entire financial system. That changed after that.
2. That is a fine argument - I agree with you that banks should not be saved. Unfortunately, when they get too big, then they threaten the system itself and that was the worry. But I agree that the proper approach would have been a pre-packaged bankruptcy aka the Swedish approach.
Moreover, we should reinstate the laws that separated commercial banking from investment banking. And we should regulate the CDS market - a huge component of the system failure worry wasn't that an individual bank was going to fail - it was that all these different banks had CDSs to protect themselves. That created a stronger interconnection between the banks. Regulate the CDS market via a central marketplace with a clearing mechanism.
On your last point, if the goal is to provide liquidity, lending at a high interest rate won't do it. The point is to keep the market being a market - if you have the high interest rates people won't borrow and the banks will just hold onto that capital, and the market will continue to be frozen. Runs on the bank are stopped by the FDIC which secures depositor money - so you're mixing up why a bank might need the money. Also, I'm really not talking about the individual depositors - I'm talking about the commercial paper market which serves business, not individuals.
2) Ok lets asume your right:
Im against a fed in general but acting as a lender of last resort is the one of the few valid things the should do (sometimes). The problem is that the lender of last reserve thing is for banks that still are liquid and just need some cash now. A lot of banks like Lehman and other weren't liquid anymore and in that case its not really lending its more saving them. Banks that violate the golden rule of banking (lending long, borrowing short) should not get these kinds of lendings. The plaid at there own risk with ful knowlage what the do. Capitalism puniches this kind of stuff and acts as a filter. If no bank ever goes bust the banking sector will be much bigger then it normaly would (missalocation of resources).
Little extra note: Lending as last reserve should be done with high rates (if a bank really only needs it to guard agains the run the can afford it) the fed just floded the banking sector with cheap money. Thats quite diffrent then beeing lender of last reserve.