The paper by Douglas W. Diamond and Raghuram G. Rajan explores the relationship between liquidity shortages and banking crises, arguing that bank failures can themselves cause liquidity shortages, leading to a potential systemic collapse. The authors highlight that bank failures can trigger a cascade of failures, as the failure of one bank can lead to a contraction in the common pool of liquidity, affecting other banks and potentially causing a full-scale financial crisis. They discuss the role of government intervention, noting that while liquidity problems and solvency problems can interact, making it difficult to determine the root cause of a crisis, interventions should aim to address both issues. The paper also examines the complexities of determining the appropriate type of intervention, balancing the costs of intervention with the risks of a financial meltdown. The authors propose a robust sequence of interventions to mitigate these risks, emphasizing the importance of understanding the underlying causes of liquidity and solvency issues.The paper by Douglas W. Diamond and Raghuram G. Rajan explores the relationship between liquidity shortages and banking crises, arguing that bank failures can themselves cause liquidity shortages, leading to a potential systemic collapse. The authors highlight that bank failures can trigger a cascade of failures, as the failure of one bank can lead to a contraction in the common pool of liquidity, affecting other banks and potentially causing a full-scale financial crisis. They discuss the role of government intervention, noting that while liquidity problems and solvency problems can interact, making it difficult to determine the root cause of a crisis, interventions should aim to address both issues. The paper also examines the complexities of determining the appropriate type of intervention, balancing the costs of intervention with the risks of a financial meltdown. The authors propose a robust sequence of interventions to mitigate these risks, emphasizing the importance of understanding the underlying causes of liquidity and solvency issues.