Defining Solvency at the Fed
Marvin Goodfriend, a professor at the Carnegie Mellon Tepper School of Business who spent 12 years as a policy adviser at the Federal Reserve Bank of Richmond, agreed. “It’s hard to define insolvency in a financial crisis, since it depends on the behavior of the entire financial system,” he said. “Solvency is only well defined when a particular firm is in trouble but the rest of the economy is O.K. When you come to a systemic problem, where the Fed’s very action has a bearing on whether those firms are solvent or not, you have a Catch-22 problem that can’t be solved.”