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Speaker 1: Hello, and welcome to another episode of the ad Thoughts Podcast.

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Speaker 1: I'm Tracy Allaway and I'm Joe. Wisn't thal Joe? We

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Speaker 1: like to talk about money on this show, don't we? We?

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Speaker 1: We sure do both sort of things that are implicitly

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Speaker 1: about money, which is everything, and then also explicitly about money,

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Speaker 1: which is what, what is it? Where does it come from?

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Speaker 1: What are some different theories of how it exists? Definitely,

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Speaker 1: I would say it's one of our favorite topics. Yeah,

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Speaker 1: and we also like to talk about the repo market.

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Speaker 1: And one other thing we like to talk about is

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Speaker 1: the inadequacies of traditional economic models. So what if we

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Speaker 1: were going to talk about all three of those in

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Speaker 1: one big episode? Oh? I like that, like a true trifecta.

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Speaker 1: Like we had a recent episode on the repo market

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Speaker 1: with the Alton posts Are that was great. We had

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Speaker 1: UH We talked to Lord Skidelski recently on the failure

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Speaker 1: of traditional UH in traditional economists to understand money, and

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Speaker 1: as you mentioned, we talked about money all the time.

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Speaker 1: So I agree that if we could sort of combine

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Speaker 1: all of these themes economist failures, money, repo, all these things,

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Speaker 1: that would be a very satisfying discussion. All right, well,

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Speaker 1: I have a feeling you're in for a satisfying discussion

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Speaker 1: because our guest today is funny that you should mention

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Speaker 1: Sultan Posar, but it's someone who has worked with Sultan

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Speaker 1: in the past, someone who result In actually quoted when

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Speaker 1: he did that episode of All Bots back in November,

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Speaker 1: and someone who Sulton says, has informed his thinking on

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Speaker 1: the repo market and the reason we're sort of focused

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Speaker 1: on the repo market particularly. But and it's going to

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Speaker 1: become clear as we embark on this conversation, but there

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Speaker 1: was this moment during the big rebo madness in September

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Speaker 1: where even though we had repo rates shoot up to

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Speaker 1: ten cent, we didn't see market participants come in and

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Speaker 1: actually take advantage of that rate and actually arbitrage it out.

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Speaker 1: And this was one of the big questions of that event,

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Speaker 1: like why didn't JP Morgan come in and earn ten

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Speaker 1: percent overnight in September in the repo market? Right that

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Speaker 1: whole incident. So we got through the year without another

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Speaker 1: major hiccup. Obviously, the FED sort of realized that things

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Speaker 1: were problematic, that there was a shortage of liquidity and

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Speaker 1: so on. And so they took a number of steps

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Speaker 1: basically in the final quarter of to prevent another blow

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Speaker 1: up like we saw an early September. But that doesn't

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Speaker 1: take away from the fact that that incident in early September,

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Speaker 1: when REPO rates sword, raised a whole host of new

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Speaker 1: questions about the current structure of this sort of bank

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Speaker 1: liquidity system and whether it's adequate and whether people really

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Speaker 1: understand it well. So even in the absence of another

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Speaker 1: blow up, there's still just tons of discussion about what

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Speaker 1: really needs to be done to um to address flaws

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Speaker 1: in the plumbing of the system. That's exactly right, and

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Speaker 1: we're going to be looking at that particular REPO example

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Speaker 1: through the prism of money and also an economic model

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Speaker 1: that takes into account a sort of new definition of money. So,

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Speaker 1: without further ado, why don't I bring on our guests.

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Speaker 1: I'm very excited. It's Perry Maryland, the professor of International

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Speaker 1: Political Economy at the Party School of Global Studies at

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Speaker 1: Boston University. Perry, thanks for coming on. Nice to be here. So, uh,

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Speaker 1: you can tell Joe and I are both excited to

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Speaker 1: talk with you, and we have a lot to get through.

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Speaker 1: But maybe just to begin with you walk us through

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Speaker 1: your definition of what money actually is and how your

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Speaker 1: you call it the money view. How does that differ

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Speaker 1: from a traditional economic model? UM, Well, the money view

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Speaker 1: U is an approach to thinking about UM economic interactions

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Speaker 1: that emphasizes when you when you say it's a different

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Speaker 1: view of money, it treats money. The essential quality of

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Speaker 1: money is that it's a means of settlement. It means

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Speaker 1: a payment of settling bills. UM that most of the

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Speaker 1: economy is organized as an interlocking UH set of balance

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Speaker 1: sheets promises to pay, and what you're promising to pay

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Speaker 1: is money. So the settlement constraint is the essential constraint

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Speaker 1: on the economy as a whole that keeps it sort

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Speaker 1: of coherent that people are focusing their minds on I'm

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Speaker 1: not going to actually satisfy that promise that I've made,

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Speaker 1: and so clearing and settlement becomes very central. Now you

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Speaker 1: you mentioned in the intro that that's something that he's

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Speaker 1: not really central in standard economics. UM. Standard economics is

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Speaker 1: thinking about intertemporal budget constraints and and essentially a wealth

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Speaker 1: constraint that that if you have wealth, then you can

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Speaker 1: convert that wealth into consumption or investment or whatever, and

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Speaker 1: it it pretty much assumes an economy of infinite liquidity

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Speaker 1: that you can convert from one form of wealth to

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Speaker 1: another form of wealth with no problem at all. Okay,

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Speaker 1: now that's a useful abstraction for some purposes. Um. But

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Speaker 1: if what you're interested in is money, Uh, it's not

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Speaker 1: a useful thing. It's abstracting for money essentially, and looking

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Speaker 1: behind the veil of money. The money view says, let's

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Speaker 1: look at the veil of money. The veil of money

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Speaker 1: is the essence of what's happening in the economy, not

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Speaker 1: something that's obscuring what's happening at some deeper level. Um.

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Speaker 1: So we look at the plumbing as a very serious

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Speaker 1: piece of instrumentation for a market economy, and that settlement

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Speaker 1: constraint is is the first key thing that we focus on.

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Speaker 1: So we were talking recently with the economist Robert Skidelski,

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Speaker 1: and there's this recurring theme that mainstream economists, still more

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Speaker 1: or less in their head, think of the economy as

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Speaker 1: a barter system. You have a couple of bananas, I

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Speaker 1: have some apples, and uh, money solves for the dual

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Speaker 1: coincidences of wants in case there's some sort of you know,

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Speaker 1: time lag issue. Maybe I don't want bananas, so we

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Speaker 1: find someone with pairs and so on, and money solves.

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Speaker 1: In the mainstream view of economics more or less, money

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Speaker 1: just sort of lubricates barter. And he sort of explained

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Speaker 1: all the reasons why this is a flawed view. And

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Speaker 1: I guess what you're saying is the money view, which

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Speaker 1: is the framework that you put in really makes the

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Speaker 1: money the central part. That our lives are not about

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Speaker 1: exchanging bananas for pairs or oranges or apples or whatever,

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Speaker 1: but about meeting a series of financial obligations. Yes, that's right, um,

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Speaker 1: And I would what Satowski is referring to there is

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Speaker 1: that in standard economics, money is treated as a medium

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Speaker 1: of exchange, okay, And that's what you're saying between the

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Speaker 1: bananas and apples on so forth, Um, that it's just

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Speaker 1: greasing the wheels, um, not means of payment. So that's

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Speaker 1: that's the contrast that I'm trying to make and the media.

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Speaker 1: This this money view, I should mention, is by no

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Speaker 1: means an invention of my own. There's there's it's a

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Speaker 1: long tradition in in economics of people thinking in this way. Um,

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Speaker 1: and I've learned a great deal from them, but it's

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Speaker 1: always been a kind of minority position. There seems to

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Speaker 1: be something attractive about looking through the veil of money

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Speaker 1: to see something deeper. Um and Uh, but that does

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Speaker 1: prevent you from seeing what's right in your face, and

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Speaker 1: sometimes it's very much in your face. Um. As this

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Speaker 1: repo business that you were mentioning, Um, suddenly the only

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Speaker 1: thing that's important is means of payment? Is means of payment?

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Speaker 1: Can you just clarify something you said, what is the

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Speaker 1: difference between money as a means of payment versus money

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Speaker 1: as a settlement mechanism? You sort of drew a distinction.

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Speaker 1: I'm not sure if I totally the same thing I'm meaning.

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Speaker 1: I'm meaning that to be settling a debt is paying

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Speaker 1: the debt saying yeah, So I'm just using different words

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Speaker 1: that might appeal to different people or different intuition. So

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Speaker 1: I definitely want to dig into the repo market. But

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Speaker 1: before we do, UM, I wondered if you could talk

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Speaker 1: a little bit more about how the money view informs

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Speaker 1: your understanding of capital markets, Because if we think that

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Speaker 1: money is sort of a promise to pay, and that

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Speaker 1: every day those promises need to be settled, which means

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Speaker 1: every day, you know, ideally you have a balance between

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Speaker 1: the promises or the io use that were made and

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Speaker 1: the actual cash inflows that are coming into the system.

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Speaker 1: But I think on most days you wouldn't have that.

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Speaker 1: You would always have some sort of borrower in the

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Speaker 1: financial system that doesn't have enough cash on hand to

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Speaker 1: satisfy it's promised to pay or it's iou. And that's

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Speaker 1: kind of where the capital market comes in. Well that's

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Speaker 1: where so so let me make a distinction here between

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Speaker 1: the capital market and the money market. Um. If you

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Speaker 1: are on on on in today, um that your cash

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Speaker 1: inflows are uh not sufficient to meet your cash commitments. UM,

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Speaker 1: then you are a deficit agent at the settlement and

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Speaker 1: you have to find a way to meet that deficit,

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Speaker 1: and that might be borrowing overnight okay in the money market, um,

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Speaker 1: in order to in order to meet that. So you're

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Speaker 1: just pushing off that day of settlement by one day.

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Speaker 1: The overnight rate of interest is essentially the cost of

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Speaker 1: delaying settlement by one day in the money view. That's

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Speaker 1: how you think of it. Now, the capital markets come

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Speaker 1: in because there are longer term assets there are bonds,

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Speaker 1: for example, um which are not promises to pay tomorrow right,

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Speaker 1: their promises to pay in ten years or various coupons

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Speaker 1: over the next ten years. But they have a certain

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Speaker 1: market value today. So their value today is as collateral okay,

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Speaker 1: that you can use that that their form of wealth

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Speaker 1: that you can use as collateral for borrowing overnight to

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Speaker 1: make your settlement. So there's this connection between money markets

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Speaker 1: and capital markets that that the capital values are collateral

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Speaker 1: for borrowing overnight in the money markets, and that's basically

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Speaker 1: what a repo is. So repo is side going back

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Speaker 1: to just this key question of this of the money

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Speaker 1: view as you put it, you're not really the first

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Speaker 1: originator of this view, but that it's kind of been

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Speaker 1: my minority view all along. How would you describe, uh,

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Speaker 1: the negative consequences to economics and to the understanding of

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Speaker 1: our system from uh the veil perspective, from the traditional

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Speaker 1: perspective on economics and banking which sort of abstracts away money.

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Speaker 1: What are the what are the downfalls of that system

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Speaker 1: of that approach? Well, to follow up just from where

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Speaker 1: we were talking about the capital markets, there's one in particular,

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Speaker 1: which is that you wind up having an an adequate

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Speaker 1: theory of where asset prices come from. That asset prices,

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Speaker 1: the price of these capital assets is formed in dealer

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Speaker 1: markets UM by dealers who are quoting buy and sell prices.

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Speaker 1: UM and are and and and so that the economics

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Speaker 1: of the dealer function is key for understanding the market

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Speaker 1: value of of of of these capital assets and hence

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Speaker 1: the collateral that can be used in burrowing overnight UM.

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Speaker 1: This is another thing UM that the standard economics view

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Speaker 1: abstracts from. There are no dealers right in standard economics.

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Speaker 1: It's supply and demand. There are the people who want

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Speaker 1: the assets and the people who want to sell the assets.

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Speaker 1: There's no one in between them that's making markets. So

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Speaker 1: this market making function of dealers is a second key

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Speaker 1: piece of the money view. They're really that those are

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Speaker 1: the two key pieces. One is the settlement constraint and

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Speaker 1: the second is the dealer function. UM. Bringing those up

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Speaker 1: to the center of attention things that have been abstracted

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Speaker 1: away in in standard economics. You said the economics of

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Speaker 1: the dealer function are are crucial to understanding what's happening here.

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Speaker 1: Can you walk us through exactly how you incorporate those

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Speaker 1: into your model, and the thing I'm trying to get it,

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Speaker 1: or the thing that I'm curious about, is whether or

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Speaker 1: not you're sort of looking at the dealers from a

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Speaker 1: behavioral perspective in the sense that they might all react

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Speaker 1: in a not necessarily logical or rational way because of

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Speaker 1: some behavioral pattern um that they've experienced before, or are

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Speaker 1: you incorporating them from a sort of purely economic technical standpoint,

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Speaker 1: how are you actually doing that? Well, so you bring

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Speaker 1: up the topic of behavioral economics. The the money view

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Speaker 1: is is not a an argument that people are irrational

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Speaker 1: or something like that. What the money view emphasizes is

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Speaker 1: that a lot of the behavior of people is what

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Speaker 1: we would call in mathematics a corner solution. That you're

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Speaker 1: forced to do something. You know, that's what the settlement

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Speaker 1: constraint does. Right, you have to pay, and you promised

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Speaker 1: to pay, and now you have to pay, and if

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Speaker 1: you don't pay, you are out of the game. Liquidity

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Speaker 1: kills you quick. And so that means that in order

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Speaker 1: to meet that settlement, you might have to pay ten

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Speaker 1: percent overnight. That the it's not a it's not a choice, right,

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Speaker 1: it's a it's a corner solution in order to keep

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Speaker 1: in the keeping the game. Now, why is it a

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Speaker 1: corner solution. Okay, it's because the economy as it actually

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Speaker 1: exists in reality is not an intertemporal general equilibrium. It

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Speaker 1: is period by period, day by day settlement by settlement. Um.

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Speaker 1: If people behaved in the actual world the way they

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Speaker 1: behave in economic models, they would be out of the

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Speaker 1: game very soon. So it's irrational to be a rational

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Speaker 1: actor in the real world. In the real world, the

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Speaker 1: settlement constraint actually exists. You can abstract away from it

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Speaker 1: in an economic model, but not in the real world.

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Speaker 1: In the real world, prices are formed by in dealer markets.

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Speaker 1: You can abstract from dealers in the in the in

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Speaker 1: the abstract economic model, you cannot abstract from from dealer

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Speaker 1: from the dealer function in actual in actual performance and

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Speaker 1: dealing in the real world. So this is what people

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Speaker 1: get people. This is what attracts people to the money view,

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Speaker 1: that it's very much more rooted in the reality of

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Speaker 1: market practice. And that's why the money view, as I say,

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Speaker 1: is not an invention by me um. It's a natural

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Speaker 1: point of view of people who live in the world

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Speaker 1: where you're facing these settlement constraints where you are you

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Speaker 1: are a dealer, you're you're you're carrying on a dealer

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Speaker 1: function or or something like that. You are a central banker. Um,

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Speaker 1: this is the natural point of view for somebody who

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Speaker 1: lives in that part of the system. They can't abstract

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Speaker 1: away from these things because that's their business. I remember

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Speaker 1: when we did our interview with Sulton, he talked about

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Speaker 1: repo being I think he described it how you live

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Speaker 1: to see another day. And of course that's very similar

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Speaker 1: to what you're saying. Go talk talk to us a

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Speaker 1: little bit about the financial crisis, because something you hear

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Speaker 1: from a lot of people is that mainstream economist, traditional

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Speaker 1: economics was ill equipped to see the financial crisis coming

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Speaker 1: to explain it. It didn't fit into their sort of

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Speaker 1: general equilibrium models and so forth. Connect the dots for

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Speaker 1: us between the sort of corner solutions that absolute requirements

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Speaker 1: of the dealers to do whatever they had to do

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Speaker 1: to survive another day, and the money viewers perspective on

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Speaker 1: how the financial crisis came about. Um. Well, I've written

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Speaker 1: a book about the financial crisis, The New Lombard Street. Um.

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Speaker 1: The short answer is that to understand you're talking about

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Speaker 1: the two thousand nine. Yeah. Yeah. So the way that

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Speaker 1: I would understand this is that this was a test

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Speaker 1: of this emerging market based credit system UM, sometimes called

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Speaker 1: shadow banking UM. And the the the notion of shadow

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Speaker 1: banking that I would urge UM on your listeners is

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Speaker 1: to understand shadow banking as money market funding of capital

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Speaker 1: market lending. It's the form of banking that's sort of

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Speaker 1: natural for a modern globalized, financialized economy. UM. Where you're

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Speaker 1: talking about the money market funding UM is wholesale funding

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Speaker 1: in money markets UM, not deposits right as in banks. UM.

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Speaker 1: And the capital market lending is is capital markets you know.

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Speaker 1: This is again wholesale pricing in dealer markets UM, not

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Speaker 1: bank loans you know that are that are specific to

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Speaker 1: the relationship between a bank and and the borrower. UM.

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Speaker 1: This is the modern form of of banking that evolved

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Speaker 1: as we were globalizing, UM the market system, but we

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Speaker 1: hadn't yet developed the systems for backstopping it and supporting it,

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Speaker 1: and so we had a little crisis there where when

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Speaker 1: you're doing shadow banking money market funding a capital market lending,

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Speaker 1: that means that periodically you have to roll your funding.

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Speaker 1: And if you can't roll your funding. You have to

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Speaker 1: sell your asset um and that's a fire sale, and

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Speaker 1: that's the liquidity aspect of it. The central banks put

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Speaker 1: a floor on this crisis basically by taking the shadow

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Speaker 1: banking system onto their own balance sheet, doing shadow banking

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Speaker 1: on the balance sheet of the central bank, and that

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Speaker 1: put a floor on it. But it took a while

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Speaker 1: to to sort all this out, and meanwhile there is

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Speaker 1: a bit of a crisis. So what are the implications

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Speaker 1: for financial stability now? Based on your definition of shadow banking,

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Speaker 1: so money market funding of capital market lending, when when

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Speaker 1: most regulators talk about shadow banking, they usually use a

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Speaker 1: definition that's something like financial intermediation by non bank entities,

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Speaker 1: which basically sounds like it's a bunch of unregulated activity

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Speaker 1: that it's probably nefarious in some way. But your definition

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Speaker 1: seems much more neutral. You're basically talking about extending credit

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Speaker 1: just through a slightly different channel. So how shall we

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Speaker 1: be thinking of that in terms of financial stability. Well,

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Speaker 1: that my definition is meant to um include that form

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Speaker 1: of lending if it's even if it's on a bank

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Speaker 1: balance sheet, which in most cases in two thousand seven

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Speaker 1: it was on bank balance sheet in Europe, okay, but

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Speaker 1: it was not on the bank balance sheet of the

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Speaker 1: United States, and that had to do with regulation, okay, Um,

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Speaker 1: But the economics of it was very similar whether it's

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Speaker 1: on a bank balance sheet or on some other bank

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Speaker 1: balance or some other balance sheet. That's why I want

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Speaker 1: to use that definition, so that we're not reaffying sort

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Speaker 1: of regulatory categories, but thinking about economic categories. So in

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Speaker 1: in in today's world, the important place where you see

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Speaker 1: money market funding of capital market lending is in fact

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Speaker 1: in the emerging market. UM. As you, as I'm sure

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Speaker 1: your listeners know, the the major amount of credit growth

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Speaker 1: since the financial crisis has re we've been in the

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Speaker 1: periphery in the emerging markets. These are these are dollar borrowers, UM,

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Speaker 1: long term dollar borrowers. But the actual funding of that

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Speaker 1: has been happening in the global money market dollar money

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Speaker 1: market system, sometimes using for exchange swaps in order to

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Speaker 1: in order to move it into domestic domestic funding in

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Speaker 1: other currencies. UM. This is the system that's been building

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Speaker 1: up since the since the financial crisis of two thousand seven. UM.

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Speaker 1: And this is a system that it seems to me

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Speaker 1: is most likely to be tested in in the next

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Speaker 1: uh critical moments of the of the system, and hopefully

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Speaker 1: we'll get through that and we'll find out where it

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Speaker 1: breaks and we'll fix that. So that's the place that

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Speaker 1: I'm watching. So let's just to spell it out for

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Speaker 1: the listeners. We're talking about. Okay, money market funding of

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Speaker 1: capital markets activities. You're seeing it growing in emerging markets globally,

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Speaker 1: so essentially people borrowing short term overnight in dollars then

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Speaker 1: using that funding for longer term projects. Talk to us

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Speaker 1: about uh, you know, you're saying, this is what you're watching.

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Speaker 1: What are the stresses that you're looking for, and what

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Speaker 1: you know from a financial stability perspective, what kind of

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Speaker 1: red flags or yellow yellow light should people be on

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Speaker 1: alert for. Well, what I watch is this sort of

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Speaker 1: circular loop where just imagine the following that you have

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Speaker 1: a let us say a Brazilian national champion firm that

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Speaker 1: is borrowing five year bond dollar bond okay um, and

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Speaker 1: they're using those funds for whatever their businesses. Okay, that

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Speaker 1: that bond, where does the money come from? Okay, that

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Speaker 1: bond is bought let's say by some uh Asian bank

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Speaker 1: that is then going to fund that in three months

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Speaker 1: dollar money markets. It's borrowing from some French bank that's

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Speaker 1: issuing that's buying that three month paper, which is funding

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Speaker 1: in overnight repo in in in global money markets, which

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Speaker 1: or maybe in the eurodollar market. And then the Central

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Speaker 1: Bank of Brazil is acquiring dollar balances as its reserves.

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Speaker 1: So that's you see how that's a round trip. Okay,

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Speaker 1: So Brazil as a country is borrowing five year in dollars,

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Speaker 1: that's its on the non financial corporate um and lending

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Speaker 1: um in the in the global dollar money markets as

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Speaker 1: the central bank reserves. So all of that loop work okay,

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Speaker 1: until it doesn't. Their number of links right that we're

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Speaker 1: looking at, and any one of those lengths that if

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Speaker 1: it were to fail, would cause a would cause problems

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Speaker 1: in the system as a whole that that loop has

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Speaker 1: to close in order for in order for the system

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Speaker 1: to be maintained. One place that loop might not close

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Speaker 1: is that Brazil is is borrowing long and lending shorts, okay,

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Speaker 1: and the rest of the world is is lending long

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Speaker 1: and borrowing short. Thing, So the rest of the world

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Speaker 1: is acting like a bank for Brazil, right, and and

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Speaker 1: Brazil's source of liquidity is its deposits in that rest

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Speaker 1: of the World Bank, which is which is not in

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Speaker 1: the United States at all. By the way, you noticed

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Speaker 1: that I haven't mentioned the United States. Okay, it's all

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Speaker 1: in dollars, but it's not in the United States. So

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Speaker 1: there's another little link. What is the link between the

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Speaker 1: lender of last resort, the actual source of dollars, the FED, okay,

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Speaker 1: and this global dollar system that is offshore. So all

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Speaker 1: of these links are, they exist, there are lengths um

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Speaker 1: and they will be tested. That's what financial crisis are

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Speaker 1: for at some high level, to to to see if

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Speaker 1: you have the proper links and to and to improve them.

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Speaker 1: That we learn in each crisis where exactly is the

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Speaker 1: weak link, and then we fix that link and we

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Speaker 1: go on and then we find out where the next

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Speaker 1: week oft link is. And this is how the system works.

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Speaker 1: I've forgot to mention at the beginning. There's actually a

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Speaker 1: fourth major odd thoughts topic that your research also touches on,

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Speaker 1: and that is the dominance of the US dollar in

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Speaker 1: the global financial system. Of course, and we've spoken to

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Speaker 1: people like Hun Song Shin from the Bank for International

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Speaker 1: Settlements about this centrality of the dollar in global markets.

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Speaker 1: Mostly via funding markets and capital markets. As you point out, UM,

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Speaker 1: I do want to talk about the repo market. But

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Speaker 1: before we do, and since we're on the topic of

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Speaker 1: emerging markets, what is the money view actually say about China?

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Speaker 1: About China? I guess one of the things that I've

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Speaker 1: said about China is that the notion that the R

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Speaker 1: and B is going to be the global currency is

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Speaker 1: not any time soon. UM. I think that's now the

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Speaker 1: usual point of view. But when I was writing about

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Speaker 1: this or five years ago, UM, maybe you remember, there

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Speaker 1: was some excitement about R and B replacing the dollar. UM.

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Speaker 1: But I think that's because people saw that China was

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Speaker 1: a large country and they were not understanding what what

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Speaker 1: what what does it mean to be a global reserve

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Speaker 1: currency that all of the plumbing, all of the apparatus.

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Speaker 1: Are you really prepared to do all of that stuff? Um?

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Speaker 1: And the answers basically no. So the the the the

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Speaker 1: the world system is still global dollar system. UM. And

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Speaker 1: I I'm glad you mentioned hun Shin. UM. I learned

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Speaker 1: very much from the reports of the b I S

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Speaker 1: and from and from hun Shin and his whole group,

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Speaker 1: so they are I view them as fellow travelers in

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Speaker 1: the money view. Um, we're on the same point of view.

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Speaker 1: And as I said, that's because it's a natural point

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Speaker 1: of view for people who are in central banks. And

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Speaker 1: what's more central banking than the b I s, it's

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Speaker 1: the it's the place where the central banks I'll talk

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Speaker 1: to each other. Well, so you gave that example of

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Speaker 1: the Brazilian company going out and borrowing for five years

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Speaker 1: maybe from an Asian bank, which then gets its funding

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Speaker 1: from a French bank and so on, and as you

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Speaker 1: pointed out, you could have this entire dollar system without

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Speaker 1: it actually without any involvement of a US financial entity.

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Speaker 1: And speaking of the centrality of the dollar, that was

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Speaker 1: actually Mark Carney's speech at Jackson Hole about how this

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Speaker 1: is becoming a problem so speak, because the US is

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Speaker 1: becoming a smaller and smaller share of GDP around the globe,

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Speaker 1: and yet the dollar and therefore the influence of the

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Speaker 1: FED is taking this outside role. Does that concern you,

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Speaker 1: I mean, do you share that view that ultimately there's

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Speaker 1: an instability there and that the longer it goes on

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Speaker 1: without some sort of next thing or post dollar multi

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Speaker 1: currency world, that that creates a problem or is that

433
00:26:54,880 --> 00:26:58,199
Speaker 1: more or less sustainable. I think it can work. I

434
00:26:58,200 --> 00:27:01,000
Speaker 1: think it is. It is potentially sustain annable. UM. I

435
00:27:01,040 --> 00:27:04,320
Speaker 1: would I would point you to a key piece of

436
00:27:04,400 --> 00:27:08,320
Speaker 1: this UM at the moment are the liquidity swaps between

437
00:27:08,359 --> 00:27:11,840
Speaker 1: the major central banks UM which connect the dollar with

438
00:27:11,880 --> 00:27:15,000
Speaker 1: all the other currencies UM as as a backstop for

439
00:27:15,040 --> 00:27:18,560
Speaker 1: this global dollar system. The fact that the United States

440
00:27:19,240 --> 00:27:23,000
Speaker 1: is it is a shrinking fraction of a larger global economy, okay,

441
00:27:23,240 --> 00:27:26,800
Speaker 1: does not seem to me necessarily to say that therefore

442
00:27:27,119 --> 00:27:29,480
Speaker 1: we need a multi currency system or that we can't

443
00:27:29,520 --> 00:27:32,440
Speaker 1: have a global dollar system. It's just that what's happening

444
00:27:32,520 --> 00:27:36,080
Speaker 1: is the internationalization of the dollar, okay. UM that the

445
00:27:36,160 --> 00:27:39,679
Speaker 1: dollar is not just the United States problem. It's everyone's problem.

446
00:27:39,800 --> 00:27:43,879
Speaker 1: It's everyone's currency, and so it's a political challenge, I

447
00:27:43,920 --> 00:27:47,320
Speaker 1: think more than an economic challenge. Like that, the management

448
00:27:47,359 --> 00:27:50,359
Speaker 1: of the global dollar system is not just the Fed's problem.

449
00:27:50,440 --> 00:27:53,359
Speaker 1: It's the it's the problem of all the central banks

450
00:27:53,440 --> 00:27:56,280
Speaker 1: and the committee, if you will, of central banks working

451
00:27:56,320 --> 00:28:00,440
Speaker 1: together to to manage the global dollar system. Them It's

452
00:28:00,480 --> 00:28:04,600
Speaker 1: not just the USS dollar anymore, it's everyone's dollar. You

453
00:28:04,760 --> 00:28:08,320
Speaker 1: mentioned the coordinating role of the global central banks and

454
00:28:08,880 --> 00:28:11,800
Speaker 1: at Columbia. The professor Adam Two's wrote this wrote this

455
00:28:11,840 --> 00:28:14,800
Speaker 1: book crashed, and it really talked a lot about the

456
00:28:14,920 --> 00:28:18,200
Speaker 1: various UHC swap lines that the FED set up with

457
00:28:18,240 --> 00:28:22,680
Speaker 1: other central banks to ameliorate the dollar shortage UH during

458
00:28:22,760 --> 00:28:26,080
Speaker 1: the crisis. Do you worry about the politics of that? So,

459
00:28:26,160 --> 00:28:28,680
Speaker 1: let's say that needed to be fleshed out. I mean,

460
00:28:28,720 --> 00:28:34,199
Speaker 1: I'm trying to imagine in today's world, there's so much uh,

461
00:28:34,240 --> 00:28:39,200
Speaker 1: you know, and antipathy towards globalization. UH, this twitter world

462
00:28:39,360 --> 00:28:43,720
Speaker 1: we live in, whether politics could get in the way

463
00:28:44,120 --> 00:28:47,760
Speaker 1: of essentially creating the plumbing fixes that would need to

464
00:28:47,840 --> 00:28:51,640
Speaker 1: maintain the dollar standard on a global basis. Yes, making

465
00:28:51,720 --> 00:28:54,840
Speaker 1: his work politically is I think the biggest challenge. As

466
00:28:54,880 --> 00:28:58,440
Speaker 1: I said, The economics I think is pretty clear. Um,

467
00:28:58,520 --> 00:29:01,280
Speaker 1: once you get out of standard economics, as I say,

468
00:29:01,280 --> 00:29:03,280
Speaker 1: and you start to see this through the money view,

469
00:29:03,560 --> 00:29:06,120
Speaker 1: you understand you understand what this is about. UM. You

470
00:29:06,160 --> 00:29:08,080
Speaker 1: mentioned Adam too. He was my colleague when I was

471
00:29:08,280 --> 00:29:11,240
Speaker 1: at Colombia, and we talked a lot about these matters.

472
00:29:11,840 --> 00:29:14,240
Speaker 1: We we ran a project at the c GT together,

473
00:29:14,680 --> 00:29:18,040
Speaker 1: UM and he he this foreign exchange swap. He cites

474
00:29:18,080 --> 00:29:20,680
Speaker 1: my little article on foreign exchange swaps. So this is

475
00:29:20,760 --> 00:29:23,440
Speaker 1: this is another fellow traveler in the money view, I

476
00:29:23,440 --> 00:29:28,280
Speaker 1: would say, so this is very much compatible with UH.

477
00:29:28,320 --> 00:29:33,200
Speaker 1: And he is as a historian thinking about the politics

478
00:29:33,240 --> 00:29:35,920
Speaker 1: of this, Um, how is this going to be? What

479
00:29:36,040 --> 00:29:39,640
Speaker 1: is this? This is a challenge. This was a global crisis, right.

480
00:29:39,720 --> 00:29:43,080
Speaker 1: This was not just a domestic in the US crisis

481
00:29:43,120 --> 00:29:47,440
Speaker 1: in in the subprime mortgage market. It was global money markets,

482
00:29:47,440 --> 00:29:50,200
Speaker 1: global dollar money markets that froze up. That's why it

483
00:29:50,240 --> 00:29:53,560
Speaker 1: was a global crisis, and it took form in different

484
00:29:53,600 --> 00:29:56,479
Speaker 1: countries around the world, depending in a different form um,

485
00:29:56,560 --> 00:30:00,200
Speaker 1: depending on where and how they kind of tacked to

486
00:30:00,280 --> 00:30:03,040
Speaker 1: this global dollar system. That's the great thing about his

487
00:30:03,080 --> 00:30:06,600
Speaker 1: book is to really make clear um the global character

488
00:30:06,680 --> 00:30:09,440
Speaker 1: of this thing um and that it was global because

489
00:30:09,640 --> 00:30:12,360
Speaker 1: the dollar system is global, that this crisis was a

490
00:30:12,400 --> 00:30:15,680
Speaker 1: crisis of the dollar system. Well, let's talk about the

491
00:30:15,720 --> 00:30:18,800
Speaker 1: repo market blow up in September, because that was another

492
00:30:18,840 --> 00:30:23,280
Speaker 1: crisis in dollar funding markets that could conceivably have gone

493
00:30:23,280 --> 00:30:27,840
Speaker 1: global if the Federal Reserve hadn't acted UH relatively quickly.

494
00:30:28,400 --> 00:30:33,280
Speaker 1: What's your understanding of what happened in the repo market

495
00:30:33,480 --> 00:30:37,640
Speaker 1: and the conditions through the money view prism that led

496
00:30:37,720 --> 00:30:41,400
Speaker 1: up to it. Well, I guess I do think that

497
00:30:41,600 --> 00:30:46,800
Speaker 1: zoltan Posts analysis of this is basically right. Um I

498
00:30:46,960 --> 00:30:50,080
Speaker 1: would he's down in the weeds, you know, because he's

499
00:30:50,120 --> 00:30:53,160
Speaker 1: dealing directly with people who are trading in this market.

500
00:30:53,280 --> 00:30:55,840
Speaker 1: Let me just pull back to the feet view a

501
00:30:55,880 --> 00:31:00,120
Speaker 1: little bit, thinking about what the response of regular or

502
00:31:00,160 --> 00:31:04,080
Speaker 1: authorities was to the financial crisis, And to a large extent,

503
00:31:04,160 --> 00:31:07,960
Speaker 1: the response has been imagining that what we really need

504
00:31:08,040 --> 00:31:10,560
Speaker 1: to do is get more capital in this system. We need,

505
00:31:10,720 --> 00:31:14,480
Speaker 1: we need to We're thinking about this as a solvency problem,

506
00:31:14,480 --> 00:31:18,520
Speaker 1: not a liquidity problem, okay. And the way they they therefore,

507
00:31:18,560 --> 00:31:23,520
Speaker 1: the regulatory apparatus UH with Dodd Frank and others responded

508
00:31:23,840 --> 00:31:28,600
Speaker 1: was to try to kill unsecured money market credit and

509
00:31:28,680 --> 00:31:32,040
Speaker 1: to and to emphasize secured money market credit, which is

510
00:31:32,080 --> 00:31:34,520
Speaker 1: to say, to kill the Fed funds market, to kill

511
00:31:34,520 --> 00:31:36,280
Speaker 1: the your a dollar market, and to focus on the

512
00:31:36,320 --> 00:31:39,720
Speaker 1: repo market as a money market because repo is secured

513
00:31:39,760 --> 00:31:43,800
Speaker 1: overnight money. Right, there's some some some capital asset that

514
00:31:43,920 --> 00:31:47,280
Speaker 1: is collateral for this borrowing, whereas Fed funds and your

515
00:31:47,280 --> 00:31:49,080
Speaker 1: a dollar are not secured. These are these are just

516
00:31:49,160 --> 00:31:54,280
Speaker 1: interbank borrowing. So by shifting the emphasis in what is

517
00:31:54,320 --> 00:31:56,960
Speaker 1: the instrument that you're using as a death sit agent

518
00:31:57,360 --> 00:32:00,640
Speaker 1: to satis to live to fight another day, your seeing repo.

519
00:32:00,840 --> 00:32:04,320
Speaker 1: There's much much more emphasis on that kind of credit

520
00:32:04,480 --> 00:32:07,280
Speaker 1: now than there was ten years ago, and so the

521
00:32:07,400 --> 00:32:11,760
Speaker 1: shortage of collateral can cause problems. We this is now

522
00:32:11,800 --> 00:32:15,880
Speaker 1: the marginal source of overnight credit globally, so it's much

523
00:32:15,960 --> 00:32:21,120
Speaker 1: more important market than than it was formally and and

524
00:32:21,160 --> 00:32:23,320
Speaker 1: so all that's where the stresses are going to show up.

525
00:32:23,360 --> 00:32:25,560
Speaker 1: And that's what you saw in September, that that's where

526
00:32:25,600 --> 00:32:29,120
Speaker 1: the stresses showed up. It wouldn't have been so um

527
00:32:29,160 --> 00:32:32,320
Speaker 1: ten ten years ago because there would have been alternative

528
00:32:32,320 --> 00:32:35,720
Speaker 1: places where if you needed to borrow overnight you could

529
00:32:36,000 --> 00:32:38,719
Speaker 1: And that's less so. And some of that's because of

530
00:32:39,280 --> 00:32:43,400
Speaker 1: regulatory constraints. Some of that's misguided. They're not understanding that

531
00:32:43,480 --> 00:32:46,200
Speaker 1: there's a liquidity dimension to this thing that you need

532
00:32:46,240 --> 00:32:48,640
Speaker 1: to be you need to be paying attention to, and

533
00:32:48,640 --> 00:32:51,680
Speaker 1: that just making it safe, that is to say, secure

534
00:32:51,720 --> 00:32:55,360
Speaker 1: credit is safer than unsecured credit. UM, maybe making it

535
00:32:55,440 --> 00:32:59,080
Speaker 1: more fragile. Explain that further, because I don't think that's

536
00:32:59,240 --> 00:33:03,040
Speaker 1: an intuitive concept to people generally. But this idea, and

537
00:33:03,160 --> 00:33:05,680
Speaker 1: you know, for those who haven't listened to the past,

538
00:33:05,800 --> 00:33:08,520
Speaker 1: the repo market, you have to post collateral and then

539
00:33:08,560 --> 00:33:13,280
Speaker 1: you get liquidity, and in theory that's safer. But what

540
00:33:13,360 --> 00:33:15,760
Speaker 1: you're saying, and again this goes back to your original

541
00:33:15,800 --> 00:33:19,360
Speaker 1: point that it's not about wealth constraints or budget constraints,

542
00:33:19,360 --> 00:33:22,680
Speaker 1: it's about liquidity constraints or that's where the weakness in

543
00:33:22,720 --> 00:33:27,320
Speaker 1: the system is. Explain how uh sort of regulators may

544
00:33:27,360 --> 00:33:32,320
Speaker 1: have taken the wrong lesson from the crisis by misunderstanding

545
00:33:32,520 --> 00:33:36,320
Speaker 1: the money view, and how we still have things defects. Well,

546
00:33:36,400 --> 00:33:39,920
Speaker 1: some of this is about the politics of regulation, right.

547
00:33:40,040 --> 00:33:45,200
Speaker 1: The the what was pushing the regulatory reform was the

548
00:33:45,240 --> 00:33:49,200
Speaker 1: concern that the taxpayer not beyond the hook. Okay, And

549
00:33:49,320 --> 00:33:52,040
Speaker 1: so this is about solvency. We want to make we

550
00:33:52,080 --> 00:33:55,320
Speaker 1: want to make sure that the taxpayer is not is

551
00:33:55,320 --> 00:33:59,760
Speaker 1: not bailing out bankers, is not we're not taking wealth

552
00:34:00,400 --> 00:34:05,000
Speaker 1: from households like me, okay and giving it to large

553
00:34:05,040 --> 00:34:09,960
Speaker 1: banks that have made ridiculous ridiculous best. Okay. That's the politics, right,

554
00:34:10,040 --> 00:34:14,759
Speaker 1: That is about redistribution from the taxpayer to to some financiers.

555
00:34:14,800 --> 00:34:17,799
Speaker 1: Who have made bad bets, and so that's why the

556
00:34:17,840 --> 00:34:20,600
Speaker 1: focus was on getting more capital in the system as

557
00:34:20,600 --> 00:34:23,760
Speaker 1: a buffer that you can run through that you won't

558
00:34:23,800 --> 00:34:26,160
Speaker 1: have to rely on the taxpayer. That was the politics

559
00:34:26,160 --> 00:34:29,400
Speaker 1: of it. Okay. However, a great deal of this crisis

560
00:34:29,520 --> 00:34:33,600
Speaker 1: was not at all about UM losses. Like that. You

561
00:34:33,640 --> 00:34:36,719
Speaker 1: know that there that there were capital market assets that

562
00:34:36,800 --> 00:34:39,680
Speaker 1: that had a value of zero UM, and so therefore

563
00:34:39,719 --> 00:34:42,800
Speaker 1: there were losses to be absorbed. These were liquidity problems.

564
00:34:42,840 --> 00:34:47,320
Speaker 1: Liquidity problems which meant putting off the promise to pay

565
00:34:47,520 --> 00:34:51,000
Speaker 1: until tomorrow until you can pay it so ultimately it

566
00:34:51,040 --> 00:34:55,400
Speaker 1: can be paid, just not today. Okay, that's a liquidity problem.

567
00:34:55,560 --> 00:34:58,640
Speaker 1: A liquidity problem is when you can't make a payment today,

568
00:34:58,680 --> 00:35:01,560
Speaker 1: but you will be able to make attainment tomorrow or

569
00:35:01,600 --> 00:35:03,759
Speaker 1: in a week or in three months, and you need

570
00:35:04,400 --> 00:35:08,120
Speaker 1: money to bide you over UM. But that is not

571
00:35:08,239 --> 00:35:11,759
Speaker 1: money that's coming from the taxpayer, because it's repaid. It's

572
00:35:11,760 --> 00:35:14,759
Speaker 1: not a wealth transfer, right, it's just And so this

573
00:35:14,840 --> 00:35:16,719
Speaker 1: is this is the alchemy of banking that we use.

574
00:35:16,840 --> 00:35:20,560
Speaker 1: You expand balance sheets UM in order and by providing

575
00:35:20,640 --> 00:35:23,879
Speaker 1: extra means of payment today which you can then pull

576
00:35:23,960 --> 00:35:27,640
Speaker 1: back UM later on when when this when you get

577
00:35:27,680 --> 00:35:31,400
Speaker 1: a better alignment between the pattern of cash promises and

578
00:35:31,440 --> 00:35:34,560
Speaker 1: the cat pattern of actual cash flow. That's what a

579
00:35:34,640 --> 00:35:38,799
Speaker 1: liquidity That's what liquidity is about. Is about maintaining that

580
00:35:38,920 --> 00:35:42,640
Speaker 1: balance between the pattern across the economy as a whole,

581
00:35:42,680 --> 00:35:46,000
Speaker 1: across the world as a whole of of promises to

582
00:35:46,080 --> 00:35:48,680
Speaker 1: pay and the pattern across the economy as a whole

583
00:35:48,680 --> 00:35:51,840
Speaker 1: across the world of whole as a whole of actual

584
00:35:51,880 --> 00:35:55,719
Speaker 1: capacity to make those payments. Um and misalignment of that,

585
00:35:55,719 --> 00:35:59,040
Speaker 1: that's when you have a financial crisis. Right. So, post crisis,

586
00:35:59,080 --> 00:36:04,840
Speaker 1: regulators sort of focused on solvency, encouraging banks to hold

587
00:36:04,880 --> 00:36:08,759
Speaker 1: all this additional capital, and maybe arguably didn't focus enough

588
00:36:08,960 --> 00:36:13,200
Speaker 1: on liquidity and liquidity risks. Uh So, now we have

589
00:36:13,239 --> 00:36:17,680
Speaker 1: the Federal Reserve that is injecting billions of dollars worth

590
00:36:17,719 --> 00:36:20,840
Speaker 1: of liquidity into the repo market. There's some talk also

591
00:36:20,920 --> 00:36:24,600
Speaker 1: about creating a standing repo facility. This is something that

592
00:36:25,440 --> 00:36:29,359
Speaker 1: I think it was Bill Dudley mentioned recently, what's your

593
00:36:29,920 --> 00:36:37,760
Speaker 1: preferred solution to repo market vulnerability at the moment. So again,

594
00:36:37,800 --> 00:36:40,760
Speaker 1: thirty thousand feet, let's back up. We've been shifting from

595
00:36:40,960 --> 00:36:45,960
Speaker 1: a bank lending credit system to a market based credit system.

596
00:36:46,040 --> 00:36:49,200
Speaker 1: These proposals that you're talking about are an attempt to

597
00:36:49,440 --> 00:36:53,520
Speaker 1: adapt the modern operations central banking to this new market

598
00:36:53,520 --> 00:36:57,400
Speaker 1: based credit system by operating in the instruments that the

599
00:36:57,440 --> 00:37:01,799
Speaker 1: market based credit system is using. So those two examples

600
00:37:01,840 --> 00:37:05,320
Speaker 1: you gave um that the FED can inject new liquid

601
00:37:05,400 --> 00:37:09,400
Speaker 1: more liquidity um, which it has done by by engaging

602
00:37:09,400 --> 00:37:13,279
Speaker 1: with dealers um. Or it could create a repo facility.

603
00:37:13,360 --> 00:37:15,279
Speaker 1: This is what we call in the economics of the

604
00:37:15,280 --> 00:37:17,520
Speaker 1: dealer function, the difference between the inside spread and the

605
00:37:17,560 --> 00:37:22,040
Speaker 1: outside spread. The the repo the repo facility that you're

606
00:37:22,080 --> 00:37:25,000
Speaker 1: talking about is an outside spread. It's saying if you

607
00:37:25,280 --> 00:37:27,920
Speaker 1: if there's a problem in the repo market, the FED

608
00:37:28,040 --> 00:37:31,600
Speaker 1: will do repo with you, but at an unfavorable price.

609
00:37:31,840 --> 00:37:34,640
Speaker 1: You know, it will go either way, it will. It's

610
00:37:34,640 --> 00:37:37,360
Speaker 1: a it's a like a by cell spread that the

611
00:37:37,440 --> 00:37:41,200
Speaker 1: FED is offering away from the market price. So normally

612
00:37:41,640 --> 00:37:45,520
Speaker 1: it's like the discount rate for for the bank lending system.

613
00:37:45,560 --> 00:37:48,520
Speaker 1: That's that's essentially what this is is an analog to

614
00:37:48,600 --> 00:37:52,000
Speaker 1: the discount window, but for the market based credit system,

615
00:37:52,040 --> 00:37:55,920
Speaker 1: that's what that's what this report facility is intended to

616
00:37:56,080 --> 00:37:59,360
Speaker 1: be exactly how to run that so that it doesn't

617
00:37:59,360 --> 00:38:02,160
Speaker 1: cause moral hazard problems. You know, we have a hundred

618
00:38:02,239 --> 00:38:04,960
Speaker 1: years of experience running a discount window in order to

619
00:38:05,000 --> 00:38:07,480
Speaker 1: make that work. We're just making it up right now

620
00:38:07,520 --> 00:38:10,160
Speaker 1: for the market based credit system. So it we can

621
00:38:10,239 --> 00:38:12,759
Speaker 1: learn things from the past. But but we need to

622
00:38:12,760 --> 00:38:15,719
Speaker 1: be a little humble and appreciate that we're inventing some

623
00:38:15,800 --> 00:38:19,879
Speaker 1: new thing for this new globalized market based credit system.

624
00:38:19,920 --> 00:38:24,960
Speaker 1: That's the context of these of these proposals. UM. The

625
00:38:25,120 --> 00:38:27,680
Speaker 1: right thing from my point of view, for the most

626
00:38:27,719 --> 00:38:30,040
Speaker 1: important thing for a central bank to be focusing on

627
00:38:30,520 --> 00:38:32,840
Speaker 1: is the dealer of last resort function. That it that

628
00:38:32,920 --> 00:38:36,880
Speaker 1: it is a backstop to prevent financial crises. That and

629
00:38:36,920 --> 00:38:39,920
Speaker 1: so that's why this repo facility to me, is the

630
00:38:39,960 --> 00:38:43,680
Speaker 1: more important thing. UM. When the when the set is

631
00:38:43,760 --> 00:38:47,719
Speaker 1: trading with the market, um injecting and and and pulling out.

632
00:38:48,000 --> 00:38:50,200
Speaker 1: It's operating at the insides, but it's operating at the

633
00:38:50,239 --> 00:38:54,840
Speaker 1: market price, but the outside spread, which is its promise.

634
00:38:55,520 --> 00:38:59,439
Speaker 1: It's it's facility that usually in normal times doesn't get

635
00:38:59,520 --> 00:39:02,520
Speaker 1: used at all. It's just standing there and dealers know

636
00:39:02,640 --> 00:39:07,200
Speaker 1: it's there, and so they know that if there's a problem, um,

637
00:39:07,280 --> 00:39:09,080
Speaker 1: that's the price that they're going to have to pay

638
00:39:09,080 --> 00:39:11,640
Speaker 1: to get liquidity, and it's not a nice price. So

639
00:39:12,120 --> 00:39:15,440
Speaker 1: they try to organize their books and their business so

640
00:39:15,480 --> 00:39:17,719
Speaker 1: they don't have to go there. But if they have

641
00:39:17,840 --> 00:39:20,319
Speaker 1: to go there, they can go there. I want to

642
00:39:20,320 --> 00:39:22,399
Speaker 1: just step back for a second to something you said,

643
00:39:22,480 --> 00:39:24,359
Speaker 1: because I have a feeling there's a lot of people

644
00:39:24,360 --> 00:39:26,719
Speaker 1: who disagree, and I'm curious how you addressed it. When

645
00:39:26,760 --> 00:39:29,799
Speaker 1: you're talking about the crisis, You're like, Okay, regulators really

646
00:39:29,840 --> 00:39:34,279
Speaker 1: put a high emphasis on capital requirements and making sure

647
00:39:34,320 --> 00:39:37,799
Speaker 1: that banks are solvent, and that really they sort of

648
00:39:37,840 --> 00:39:42,239
Speaker 1: neglected the role of illiquidity in the crisis, And I

649
00:39:42,239 --> 00:39:46,040
Speaker 1: think in the popular conception, everyone would be like, look,

650
00:39:46,080 --> 00:39:48,760
Speaker 1: I saw that movie where they made really stupid loans

651
00:39:48,800 --> 00:39:51,319
Speaker 1: two people in Florida, and the loans were bad, and

652
00:39:51,360 --> 00:39:56,000
Speaker 1: obviously bankers were doing all these uh ninja loans and

653
00:39:56,600 --> 00:40:00,399
Speaker 1: sub prime borrowers, and obviously in the popular concept, it's

654
00:40:00,400 --> 00:40:04,200
Speaker 1: not about liquidity but just about bad underwriting and greed

655
00:40:04,400 --> 00:40:06,840
Speaker 1: and all that. How do you if someone were to

656
00:40:06,880 --> 00:40:10,919
Speaker 1: say that to you, how do you make the case that, yes,

657
00:40:11,040 --> 00:40:15,319
Speaker 1: that may all have existed, but still it really was

658
00:40:15,520 --> 00:40:18,880
Speaker 1: in large part a liquidity problem as opposed to a

659
00:40:19,000 --> 00:40:22,200
Speaker 1: capital shortfall problem problem. Well, I would say that person,

660
00:40:22,239 --> 00:40:24,719
Speaker 1: it's I've seen those movies too, Okay, And all of

661
00:40:24,719 --> 00:40:30,400
Speaker 1: that is true. All of that happened, and in exuberant periods,

662
00:40:30,800 --> 00:40:35,480
Speaker 1: crazy things happen, um, and an illegal things happen, um,

663
00:40:35,520 --> 00:40:38,279
Speaker 1: And you need to clean that up. Okay, But that

664
00:40:38,320 --> 00:40:42,640
Speaker 1: doesn't necessarily lead to a global financial crisis. Okay. That

665
00:40:42,719 --> 00:40:45,759
Speaker 1: happened to be the trigger, okay, but it actually was

666
00:40:45,800 --> 00:40:48,600
Speaker 1: not the substance of the of the global financial crisis.

667
00:40:48,640 --> 00:40:51,920
Speaker 1: If all it had been was just a subprime mortgage crisis,

668
00:40:52,280 --> 00:40:54,880
Speaker 1: there wouldn't have been a global financial crisis, um. And

669
00:40:54,920 --> 00:40:56,960
Speaker 1: we would have been able to clean that up. And

670
00:40:57,000 --> 00:41:00,000
Speaker 1: in cleaning that up, you do need to fix underwrite,

671
00:41:00,440 --> 00:41:04,360
Speaker 1: you do need to to to change some of that regulation.

672
00:41:04,480 --> 00:41:08,319
Speaker 1: All of that was a reasonable reaction to a subprime

673
00:41:08,680 --> 00:41:11,799
Speaker 1: evolution that got out of hand and ninja loans and

674
00:41:11,800 --> 00:41:14,040
Speaker 1: all of that. Um. So I agree with all of

675
00:41:14,040 --> 00:41:17,239
Speaker 1: that that that it wasn't that that that cleaning that

676
00:41:17,400 --> 00:41:22,160
Speaker 1: up was was useless. It's just that cleaning that up

677
00:41:22,400 --> 00:41:24,759
Speaker 1: was not all you needed to do. And it's and

678
00:41:24,960 --> 00:41:27,320
Speaker 1: cleaning it up is not going to prevent another global

679
00:41:27,320 --> 00:41:31,640
Speaker 1: financial crisis because what actually caused the global financial crisis

680
00:41:31,680 --> 00:41:34,360
Speaker 1: was the freeze up in global funding markets, and that

681
00:41:34,480 --> 00:41:38,640
Speaker 1: was a liquidity crisis largely. It was caused, I mean,

682
00:41:38,719 --> 00:41:40,640
Speaker 1: if you want to get down into weaves about this,

683
00:41:40,920 --> 00:41:43,719
Speaker 1: by the fact that a lot of these securitized mortgages

684
00:41:44,040 --> 00:41:47,680
Speaker 1: were funded overnight, you know, on the balance sheet of

685
00:41:47,680 --> 00:41:51,160
Speaker 1: of Deutsche Bank and UBS in Europe, okay, and they

686
00:41:51,200 --> 00:41:53,920
Speaker 1: then couldn't roll their funding, and they couldn't roll the

687
00:41:53,960 --> 00:41:56,440
Speaker 1: funding for that, They couldn't roll the funding for anything.

688
00:41:56,480 --> 00:42:00,560
Speaker 1: Global money markets froze up, and so there was contagion

689
00:42:00,640 --> 00:42:04,239
Speaker 1: across the whole world. That's what you need to need

690
00:42:04,320 --> 00:42:07,040
Speaker 1: to make sure it doesn't happen that if you have

691
00:42:07,600 --> 00:42:11,680
Speaker 1: a problem in some little area like subprime mortgages, it

692
00:42:11,760 --> 00:42:15,240
Speaker 1: doesn't lead to a global financial crisis. You just deal

693
00:42:15,280 --> 00:42:18,480
Speaker 1: with that little area and meanwhile put a floor under

694
00:42:18,520 --> 00:42:21,160
Speaker 1: the under the system as a whole so that it

695
00:42:21,239 --> 00:42:26,040
Speaker 1: doesn't proliferate. Um. It did deliferate, right, that's what we saw.

696
00:42:26,360 --> 00:42:30,040
Speaker 1: The politics of it meant that you could, um, you

697
00:42:30,040 --> 00:42:33,319
Speaker 1: could focus on the subprime cleaning that up, and we did,

698
00:42:33,560 --> 00:42:36,720
Speaker 1: and that's what And putting more more capital in banks

699
00:42:36,760 --> 00:42:39,840
Speaker 1: allows them to take losses if they make back bad loans.

700
00:42:39,880 --> 00:42:43,600
Speaker 1: That's all fine, okay, But but by itself, that's not

701
00:42:43,640 --> 00:42:46,440
Speaker 1: what caused what what led to the to the global

702
00:42:46,480 --> 00:42:49,040
Speaker 1: financial crisis. You may you may even remember at the

703
00:42:49,160 --> 00:42:51,840
Speaker 1: I mean I remember I was around when it was happening.

704
00:42:51,880 --> 00:42:55,880
Speaker 1: There were many economists who who shall me remain unnamed,

705
00:42:56,280 --> 00:42:59,560
Speaker 1: who who said when the when the subprime market was

706
00:42:59,680 --> 00:43:03,240
Speaker 1: melted down, don't worry about this. This is small money

707
00:43:03,239 --> 00:43:05,479
Speaker 1: compared to the size of the mortgage market as a whole.

708
00:43:05,680 --> 00:43:08,200
Speaker 1: It's small money compared to the size of capital markets

709
00:43:08,239 --> 00:43:10,759
Speaker 1: as a whole. It will it's just pennies on the dollar.

710
00:43:11,040 --> 00:43:14,040
Speaker 1: We can absorb this. They were right about that, but

711
00:43:14,160 --> 00:43:17,120
Speaker 1: that didn't mean that it didn't cause a global financial

712
00:43:17,160 --> 00:43:21,239
Speaker 1: crisis because of the interactions between that little crisis and

713
00:43:21,239 --> 00:43:23,480
Speaker 1: and and everything else, which they did not realize. They

714
00:43:23,480 --> 00:43:25,600
Speaker 1: were not right about that that this was not a

715
00:43:25,600 --> 00:43:28,160
Speaker 1: wealth problem. If it was a wealth problem, it would

716
00:43:28,160 --> 00:43:31,759
Speaker 1: have been easily solved because it wasn't very big. You know,

717
00:43:31,880 --> 00:43:34,279
Speaker 1: there were there was a lot of skullduggery, but it

718
00:43:34,360 --> 00:43:37,600
Speaker 1: wasn't very big compared to the size of the global market,

719
00:43:37,800 --> 00:43:39,560
Speaker 1: and so it seems like we should be able to

720
00:43:39,600 --> 00:43:43,840
Speaker 1: absorb this if it's just a wealth crisis. But it wasn't.

721
00:43:44,480 --> 00:43:46,760
Speaker 1: It was a liquidity crisis, and it was a global

722
00:43:46,800 --> 00:43:50,480
Speaker 1: aquidity crisis. That's that's the piece of it that you

723
00:43:50,560 --> 00:43:53,960
Speaker 1: couldn't see looking at it from standard economics. But if

724
00:43:54,000 --> 00:43:57,200
Speaker 1: you knew how these things were being funded in the

725
00:43:57,200 --> 00:44:00,640
Speaker 1: shadow banking system, money market funding of capital market lending,

726
00:44:00,920 --> 00:44:02,919
Speaker 1: then you knew there was going to be a lot

727
00:44:02,960 --> 00:44:05,880
Speaker 1: more to this. It wasn't just about a wealth transfer

728
00:44:05,920 --> 00:44:09,239
Speaker 1: from people making god loans, um. You were going to

729
00:44:09,360 --> 00:44:12,799
Speaker 1: have a problem with rolling this funding. And it was,

730
00:44:13,040 --> 00:44:15,880
Speaker 1: and that's exactly what happened. It got a lot worse.

731
00:44:16,320 --> 00:44:19,640
Speaker 1: That's why economists didn't see it right because they weren't

732
00:44:19,640 --> 00:44:22,239
Speaker 1: paying attention to the plumbing. They were thinking of this

733
00:44:22,440 --> 00:44:26,680
Speaker 1: as as as a wealth problem, not as a liquidity problem.

734
00:44:26,719 --> 00:44:29,319
Speaker 1: And it was a wealth problem in part, okay, but

735
00:44:29,440 --> 00:44:32,160
Speaker 1: that's not what caused the crisis. It was a liquidity

736
00:44:32,160 --> 00:44:36,560
Speaker 1: problem that caused the crisis. Professor Perry Merling, thank you

737
00:44:36,640 --> 00:44:39,880
Speaker 1: so much for being on odds. I just gotta say, uh,

738
00:44:40,040 --> 00:44:41,920
Speaker 1: you know when I whenever I put out something on

739
00:44:41,960 --> 00:44:44,799
Speaker 1: Twitter saying who should we have on odd lots, your

740
00:44:44,920 --> 00:44:47,560
Speaker 1: name for like the last several months as all or

741
00:44:47,680 --> 00:44:50,200
Speaker 1: last year maybe is always one of the most frequent responses.

742
00:44:50,200 --> 00:44:52,320
Speaker 1: So I'm really glad we finally made it. Well. Um,

743
00:44:52,480 --> 00:44:54,920
Speaker 1: probably that's because, as you know, I have this online

744
00:44:54,960 --> 00:44:58,160
Speaker 1: course on course Era. So there's now half a million

745
00:44:58,160 --> 00:45:01,120
Speaker 1: people who have gone through that class and they so

746
00:45:01,239 --> 00:45:05,200
Speaker 1: they think about the world in this money view way, um,

747
00:45:05,239 --> 00:45:08,040
Speaker 1: but they don't see it in the media very much,

748
00:45:08,160 --> 00:45:11,479
Speaker 1: and so it's there. That's what they're pushing for. They're

749
00:45:11,480 --> 00:45:16,600
Speaker 1: pushing to see uh, that language moving into more more

750
00:45:16,640 --> 00:45:19,439
Speaker 1: more common usage. I'm gonna go ahead and take the course,

751
00:45:19,440 --> 00:45:23,800
Speaker 1: Sarah course, and I'm glad that it's free. Joe, It's free.

752
00:45:24,160 --> 00:45:27,040
Speaker 1: I know I'm gonna do it, I promised. Thank you.

753
00:45:27,160 --> 00:45:36,920
Speaker 1: That was great, Well, thank you for having me. Well, Joe,

754
00:45:37,080 --> 00:45:40,279
Speaker 1: I really enjoyed that conversation. As I said in the intro,

755
00:45:40,360 --> 00:45:43,640
Speaker 1: it's sort of brought together a lot of major macro

756
00:45:44,080 --> 00:45:47,920
Speaker 1: themes that we've seen on all thoughts recently. Uh, and

757
00:45:48,160 --> 00:45:50,160
Speaker 1: I named a few, but we even got a bonus

758
00:45:50,239 --> 00:45:53,160
Speaker 1: fourth one, which was the premisee of the dollar in

759
00:45:53,200 --> 00:45:56,279
Speaker 1: the global financial system. Yeah, no, I totally agree. I

760
00:45:56,320 --> 00:45:58,960
Speaker 1: feel like that was no It's like, no wonder so

761
00:45:59,000 --> 00:46:01,360
Speaker 1: many people have we've told us that we needed to

762
00:46:01,440 --> 00:46:06,120
Speaker 1: have Perry on because it really does. His work touches

763
00:46:06,160 --> 00:46:09,600
Speaker 1: on basically all of our big topics here. But I

764
00:46:09,640 --> 00:46:12,200
Speaker 1: really like that because obviously we recently, uh you know,

765
00:46:12,239 --> 00:46:15,960
Speaker 1: we talked to Skidelski recently about the failure of economists

766
00:46:15,960 --> 00:46:19,880
Speaker 1: to understand money, and I feel like, uh, Perry was

767
00:46:19,960 --> 00:46:24,080
Speaker 1: really able to drill down on this idea and put

768
00:46:24,120 --> 00:46:26,680
Speaker 1: some sort of meat on the bone about how important

769
00:46:26,680 --> 00:46:29,720
Speaker 1: it is to understand to place money at the center

770
00:46:29,760 --> 00:46:34,840
Speaker 1: of our understanding. So certainly if you follow finance, or

771
00:46:34,880 --> 00:46:37,480
Speaker 1: if you're involved in finance, and if you were in

772
00:46:37,560 --> 00:46:40,719
Speaker 1: any way following it back in two thousand eight, when

773
00:46:40,760 --> 00:46:44,640
Speaker 1: we have the financial crisis, this money view understanding of

774
00:46:44,719 --> 00:46:48,440
Speaker 1: everything just feels kind of intuitive. And I actually like

775
00:46:48,719 --> 00:46:52,239
Speaker 1: disagree with your last point about how lots of people

776
00:46:52,280 --> 00:46:55,400
Speaker 1: are going to think this is about insolvency and the

777
00:46:55,440 --> 00:46:59,279
Speaker 1: subprime crisis and greedy banks. It's definitely part of it.

778
00:46:59,360 --> 00:47:03,160
Speaker 1: But people who were following the issue very very closely

779
00:47:03,480 --> 00:47:06,200
Speaker 1: will know that it was actually caused by a massive

780
00:47:06,239 --> 00:47:09,200
Speaker 1: crunch in the shadow banking system and in the repo market.

781
00:47:09,320 --> 00:47:12,000
Speaker 1: And I don't know if you remember, but a previous

782
00:47:12,080 --> 00:47:16,000
Speaker 1: All Boughts guest, Matt King from City Group actually wrote

783
00:47:16,040 --> 00:47:20,160
Speaker 1: that amazing note in early September two tho, all about

784
00:47:20,239 --> 00:47:22,600
Speaker 1: repo market funding and how it was going to end

785
00:47:22,760 --> 00:47:25,839
Speaker 1: in tears for the broker dealers. Yeah. No, I mean,

786
00:47:26,239 --> 00:47:29,560
Speaker 1: certainly people who who were in the weeds on this

787
00:47:29,600 --> 00:47:33,920
Speaker 1: stuff or reported obviously understood the or many of them

788
00:47:33,960 --> 00:47:35,680
Speaker 1: I don't know actually if it's obvious, but many of

789
00:47:35,680 --> 00:47:38,600
Speaker 1: them did understand the centrality of the money market and

790
00:47:38,640 --> 00:47:41,399
Speaker 1: in short term funding to the crisis. But I still

791
00:47:41,440 --> 00:47:46,040
Speaker 1: think in the popular conception, and you know, as Perry

792
00:47:46,160 --> 00:47:49,279
Speaker 1: pointed out, and I think it's really important, um in

793
00:47:49,320 --> 00:47:53,440
Speaker 1: all these fixes or you can't ignore the politics of this.

794
00:47:53,920 --> 00:47:57,000
Speaker 1: And because in the popular conception, the crisis was about

795
00:47:57,360 --> 00:48:00,520
Speaker 1: greedy bankers making bad loans to people in Florida with

796
00:48:00,520 --> 00:48:03,640
Speaker 1: no jobs or no income, that did have a very

797
00:48:03,719 --> 00:48:07,560
Speaker 1: big impact on what the post regulation landscape looked like,

798
00:48:07,920 --> 00:48:11,160
Speaker 1: perhaps to our detriment, and perhaps the reason why we

799
00:48:11,200 --> 00:48:15,360
Speaker 1: still see these fragilities in the system. Yeah, for sure.

800
00:48:16,520 --> 00:48:19,400
Speaker 1: This has been another episode of the All Thoughts podcast.

801
00:48:19,520 --> 00:48:22,440
Speaker 1: I'm Tracy Alloway. You can follow me on Twitter at

802
00:48:22,480 --> 00:48:25,640
Speaker 1: Tracy Alloway and I'm Joe wi isn't thought you could

803
00:48:25,640 --> 00:48:28,920
Speaker 1: follow me on Twitter at the Stalwart. And you should

804
00:48:29,200 --> 00:48:32,080
Speaker 1: follow Perry Maryland on Twitter. His handle is at p

805
00:48:32,440 --> 00:48:35,359
Speaker 1: Maryland and check out his Coursera course. I'm going to

806
00:48:35,400 --> 00:48:38,760
Speaker 1: do so because it's free, and be sure to follow

807
00:48:38,880 --> 00:48:43,320
Speaker 1: our producer on Twitter, Laura Carlson. She's at Laura M. Carlson.

808
00:48:43,920 --> 00:48:47,359
Speaker 1: Follow the Bloomberg head Of podcast on Twitter, Francesca Leavy,

809
00:48:47,440 --> 00:48:50,600
Speaker 1: She's at Francesca Today, and check out all of the

810
00:48:50,600 --> 00:48:55,280
Speaker 1: Bloomberg podcasts under the handle at podcasts. Thanks for listening,

811
00:49:01,080 --> 00:49:01,120
Speaker 1: O