Speaker 1: Hello, and welcome to another episode of the ad Thoughts Podcast.
Speaker 1: I'm Tracy Allaway and I'm Joe. Wisn't thal Joe? We
Speaker 1: like to talk about money on this show, don't we? We?
Speaker 1: We sure do both sort of things that are implicitly
Speaker 1: about money, which is everything, and then also explicitly about money,
Speaker 1: which is what, what is it? Where does it come from?
Speaker 1: What are some different theories of how it exists? Definitely,
Speaker 1: I would say it's one of our favorite topics. Yeah,
Speaker 1: and we also like to talk about the repo market.
Speaker 1: And one other thing we like to talk about is
Speaker 1: the inadequacies of traditional economic models. So what if we
Speaker 1: were going to talk about all three of those in
Speaker 1: one big episode? Oh? I like that, like a true trifecta.
Speaker 1: Like we had a recent episode on the repo market
Speaker 1: with the Alton posts Are that was great. We had
Speaker 1: UH We talked to Lord Skidelski recently on the failure
Speaker 1: of traditional UH in traditional economists to understand money, and
Speaker 1: as you mentioned, we talked about money all the time.
Speaker 1: So I agree that if we could sort of combine
Speaker 1: all of these themes economist failures, money, repo, all these things,
Speaker 1: that would be a very satisfying discussion. All right, well,
Speaker 1: I have a feeling you're in for a satisfying discussion
Speaker 1: because our guest today is funny that you should mention
Speaker 1: Sultan Posar, but it's someone who has worked with Sultan
Speaker 1: in the past, someone who result In actually quoted when
Speaker 1: he did that episode of All Bots back in November,
Speaker 1: and someone who Sulton says, has informed his thinking on
Speaker 1: the repo market and the reason we're sort of focused
Speaker 1: on the repo market particularly. But and it's going to
Speaker 1: become clear as we embark on this conversation, but there
Speaker 1: was this moment during the big rebo madness in September
Speaker 1: where even though we had repo rates shoot up to
Speaker 1: ten cent, we didn't see market participants come in and
Speaker 1: actually take advantage of that rate and actually arbitrage it out.
Speaker 1: And this was one of the big questions of that event,
Speaker 1: like why didn't JP Morgan come in and earn ten
Speaker 1: percent overnight in September in the repo market? Right that
Speaker 1: whole incident. So we got through the year without another
Speaker 1: major hiccup. Obviously, the FED sort of realized that things
Speaker 1: were problematic, that there was a shortage of liquidity and
Speaker 1: so on. And so they took a number of steps
Speaker 1: basically in the final quarter of to prevent another blow
Speaker 1: up like we saw an early September. But that doesn't
Speaker 1: take away from the fact that that incident in early September,
Speaker 1: when REPO rates sword, raised a whole host of new
Speaker 1: questions about the current structure of this sort of bank
Speaker 1: liquidity system and whether it's adequate and whether people really
Speaker 1: understand it well. So even in the absence of another
Speaker 1: blow up, there's still just tons of discussion about what
Speaker 1: really needs to be done to um to address flaws
Speaker 1: in the plumbing of the system. That's exactly right, and
Speaker 1: we're going to be looking at that particular REPO example
Speaker 1: through the prism of money and also an economic model
Speaker 1: that takes into account a sort of new definition of money. So,
Speaker 1: without further ado, why don't I bring on our guests.
Speaker 1: I'm very excited. It's Perry Maryland, the professor of International
Speaker 1: Political Economy at the Party School of Global Studies at
Speaker 1: Boston University. Perry, thanks for coming on. Nice to be here. So, uh,
Speaker 1: you can tell Joe and I are both excited to
Speaker 1: talk with you, and we have a lot to get through.
Speaker 1: But maybe just to begin with you walk us through
Speaker 1: your definition of what money actually is and how your
Speaker 1: you call it the money view. How does that differ
Speaker 1: from a traditional economic model? UM, Well, the money view
Speaker 1: U is an approach to thinking about UM economic interactions
Speaker 1: that emphasizes when you when you say it's a different
Speaker 1: view of money, it treats money. The essential quality of
Speaker 1: money is that it's a means of settlement. It means
Speaker 1: a payment of settling bills. UM that most of the
Speaker 1: economy is organized as an interlocking UH set of balance
Speaker 1: sheets promises to pay, and what you're promising to pay
Speaker 1: is money. So the settlement constraint is the essential constraint
Speaker 1: on the economy as a whole that keeps it sort
Speaker 1: of coherent that people are focusing their minds on I'm
Speaker 1: not going to actually satisfy that promise that I've made,
Speaker 1: and so clearing and settlement becomes very central. Now you
Speaker 1: you mentioned in the intro that that's something that he's
Speaker 1: not really central in standard economics. UM. Standard economics is
Speaker 1: thinking about intertemporal budget constraints and and essentially a wealth
Speaker 1: constraint that that if you have wealth, then you can
Speaker 1: convert that wealth into consumption or investment or whatever, and
Speaker 1: it it pretty much assumes an economy of infinite liquidity
Speaker 1: that you can convert from one form of wealth to
Speaker 1: another form of wealth with no problem at all. Okay,
Speaker 1: now that's a useful abstraction for some purposes. Um. But
Speaker 1: if what you're interested in is money, Uh, it's not
Speaker 1: a useful thing. It's abstracting for money essentially, and looking
Speaker 1: behind the veil of money. The money view says, let's
Speaker 1: look at the veil of money. The veil of money
Speaker 1: is the essence of what's happening in the economy, not
Speaker 1: something that's obscuring what's happening at some deeper level. Um.
Speaker 1: So we look at the plumbing as a very serious
Speaker 1: piece of instrumentation for a market economy, and that settlement
Speaker 1: constraint is is the first key thing that we focus on.
Speaker 1: So we were talking recently with the economist Robert Skidelski,
Speaker 1: and there's this recurring theme that mainstream economists, still more
Speaker 1: or less in their head, think of the economy as
Speaker 1: a barter system. You have a couple of bananas, I
Speaker 1: have some apples, and uh, money solves for the dual
Speaker 1: coincidences of wants in case there's some sort of you know,
Speaker 1: time lag issue. Maybe I don't want bananas, so we
Speaker 1: find someone with pairs and so on, and money solves.
Speaker 1: In the mainstream view of economics more or less, money
Speaker 1: just sort of lubricates barter. And he sort of explained
Speaker 1: all the reasons why this is a flawed view. And
Speaker 1: I guess what you're saying is the money view, which
Speaker 1: is the framework that you put in really makes the
Speaker 1: money the central part. That our lives are not about
Speaker 1: exchanging bananas for pairs or oranges or apples or whatever,
Speaker 1: but about meeting a series of financial obligations. Yes, that's right, um,
Speaker 1: And I would what Satowski is referring to there is
Speaker 1: that in standard economics, money is treated as a medium
Speaker 1: of exchange, okay, And that's what you're saying between the
Speaker 1: bananas and apples on so forth, Um, that it's just
Speaker 1: greasing the wheels, um, not means of payment. So that's
Speaker 1: that's the contrast that I'm trying to make and the media.
Speaker 1: This this money view, I should mention, is by no
Speaker 1: means an invention of my own. There's there's it's a
Speaker 1: long tradition in in economics of people thinking in this way. Um,
Speaker 1: and I've learned a great deal from them, but it's
Speaker 1: always been a kind of minority position. There seems to
Speaker 1: be something attractive about looking through the veil of money
Speaker 1: to see something deeper. Um and Uh, but that does
Speaker 1: prevent you from seeing what's right in your face, and
Speaker 1: sometimes it's very much in your face. Um. As this
Speaker 1: repo business that you were mentioning, Um, suddenly the only
Speaker 1: thing that's important is means of payment? Is means of payment?
Speaker 1: Can you just clarify something you said, what is the
Speaker 1: difference between money as a means of payment versus money
Speaker 1: as a settlement mechanism? You sort of drew a distinction.
Speaker 1: I'm not sure if I totally the same thing I'm meaning.
Speaker 1: I'm meaning that to be settling a debt is paying
Speaker 1: the debt saying yeah, So I'm just using different words
Speaker 1: that might appeal to different people or different intuition. So
Speaker 1: I definitely want to dig into the repo market. But
Speaker 1: before we do, UM, I wondered if you could talk
Speaker 1: a little bit more about how the money view informs
Speaker 1: your understanding of capital markets, Because if we think that
Speaker 1: money is sort of a promise to pay, and that
Speaker 1: every day those promises need to be settled, which means
Speaker 1: every day, you know, ideally you have a balance between
Speaker 1: the promises or the io use that were made and
Speaker 1: the actual cash inflows that are coming into the system.
Speaker 1: But I think on most days you wouldn't have that.
Speaker 1: You would always have some sort of borrower in the
Speaker 1: financial system that doesn't have enough cash on hand to
Speaker 1: satisfy it's promised to pay or it's iou. And that's
Speaker 1: kind of where the capital market comes in. Well that's
Speaker 1: where so so let me make a distinction here between
Speaker 1: the capital market and the money market. Um. If you
Speaker 1: are on on on in today, um that your cash
Speaker 1: inflows are uh not sufficient to meet your cash commitments. UM,
Speaker 1: then you are a deficit agent at the settlement and
Speaker 1: you have to find a way to meet that deficit,
Speaker 1: and that might be borrowing overnight okay in the money market, um,
Speaker 1: in order to in order to meet that. So you're
Speaker 1: just pushing off that day of settlement by one day.
Speaker 1: The overnight rate of interest is essentially the cost of
Speaker 1: delaying settlement by one day in the money view. That's
Speaker 1: how you think of it. Now, the capital markets come
Speaker 1: in because there are longer term assets there are bonds,
Speaker 1: for example, um which are not promises to pay tomorrow right,
Speaker 1: their promises to pay in ten years or various coupons
Speaker 1: over the next ten years. But they have a certain
Speaker 1: market value today. So their value today is as collateral okay,
Speaker 1: that you can use that that their form of wealth
Speaker 1: that you can use as collateral for borrowing overnight to
Speaker 1: make your settlement. So there's this connection between money markets
Speaker 1: and capital markets that that the capital values are collateral
Speaker 1: for borrowing overnight in the money markets, and that's basically
Speaker 1: what a repo is. So repo is side going back
Speaker 1: to just this key question of this of the money
Speaker 1: view as you put it, you're not really the first
Speaker 1: originator of this view, but that it's kind of been
Speaker 1: my minority view all along. How would you describe, uh,
Speaker 1: the negative consequences to economics and to the understanding of
Speaker 1: our system from uh the veil perspective, from the traditional
Speaker 1: perspective on economics and banking which sort of abstracts away money.
Speaker 1: What are the what are the downfalls of that system
Speaker 1: of that approach? Well, to follow up just from where
Speaker 1: we were talking about the capital markets, there's one in particular,
Speaker 1: which is that you wind up having an an adequate
Speaker 1: theory of where asset prices come from. That asset prices,
Speaker 1: the price of these capital assets is formed in dealer
Speaker 1: markets UM by dealers who are quoting buy and sell prices.
Speaker 1: UM and are and and and so that the economics
Speaker 1: of the dealer function is key for understanding the market
Speaker 1: value of of of of these capital assets and hence
Speaker 1: the collateral that can be used in burrowing overnight UM.
Speaker 1: This is another thing UM that the standard economics view
Speaker 1: abstracts from. There are no dealers right in standard economics.
Speaker 1: It's supply and demand. There are the people who want
Speaker 1: the assets and the people who want to sell the assets.
Speaker 1: There's no one in between them that's making markets. So
Speaker 1: this market making function of dealers is a second key
Speaker 1: piece of the money view. They're really that those are
Speaker 1: the two key pieces. One is the settlement constraint and
Speaker 1: the second is the dealer function. UM. Bringing those up
Speaker 1: to the center of attention things that have been abstracted
Speaker 1: away in in standard economics. You said the economics of
Speaker 1: the dealer function are are crucial to understanding what's happening here.
Speaker 1: Can you walk us through exactly how you incorporate those
Speaker 1: into your model, and the thing I'm trying to get it,
Speaker 1: or the thing that I'm curious about, is whether or
Speaker 1: not you're sort of looking at the dealers from a
Speaker 1: behavioral perspective in the sense that they might all react
Speaker 1: in a not necessarily logical or rational way because of
Speaker 1: some behavioral pattern um that they've experienced before, or are
Speaker 1: you incorporating them from a sort of purely economic technical standpoint,
Speaker 1: how are you actually doing that? Well, so you bring
Speaker 1: up the topic of behavioral economics. The the money view
Speaker 1: is is not a an argument that people are irrational
Speaker 1: or something like that. What the money view emphasizes is
Speaker 1: that a lot of the behavior of people is what
Speaker 1: we would call in mathematics a corner solution. That you're
Speaker 1: forced to do something. You know, that's what the settlement
Speaker 1: constraint does. Right, you have to pay, and you promised
Speaker 1: to pay, and now you have to pay, and if
Speaker 1: you don't pay, you are out of the game. Liquidity
Speaker 1: kills you quick. And so that means that in order
Speaker 1: to meet that settlement, you might have to pay ten
Speaker 1: percent overnight. That the it's not a it's not a choice, right,
Speaker 1: it's a it's a corner solution in order to keep
Speaker 1: in the keeping the game. Now, why is it a
Speaker 1: corner solution. Okay, it's because the economy as it actually
Speaker 1: exists in reality is not an intertemporal general equilibrium. It
Speaker 1: is period by period, day by day settlement by settlement. Um.
Speaker 1: If people behaved in the actual world the way they
Speaker 1: behave in economic models, they would be out of the
Speaker 1: game very soon. So it's irrational to be a rational
Speaker 1: actor in the real world. In the real world, the
Speaker 1: settlement constraint actually exists. You can abstract away from it
Speaker 1: in an economic model, but not in the real world.
Speaker 1: In the real world, prices are formed by in dealer markets.
Speaker 1: You can abstract from dealers in the in the in
Speaker 1: the abstract economic model, you cannot abstract from from dealer
Speaker 1: from the dealer function in actual in actual performance and
Speaker 1: dealing in the real world. So this is what people
Speaker 1: get people. This is what attracts people to the money view,
Speaker 1: that it's very much more rooted in the reality of
Speaker 1: market practice. And that's why the money view, as I say,
Speaker 1: is not an invention by me um. It's a natural
Speaker 1: point of view of people who live in the world
Speaker 1: where you're facing these settlement constraints where you are you
Speaker 1: are a dealer, you're you're you're carrying on a dealer
Speaker 1: function or or something like that. You are a central banker. Um,
Speaker 1: this is the natural point of view for somebody who
Speaker 1: lives in that part of the system. They can't abstract
Speaker 1: away from these things because that's their business. I remember
Speaker 1: when we did our interview with Sulton, he talked about
Speaker 1: repo being I think he described it how you live
Speaker 1: to see another day. And of course that's very similar
Speaker 1: to what you're saying. Go talk talk to us a
Speaker 1: little bit about the financial crisis, because something you hear
Speaker 1: from a lot of people is that mainstream economist, traditional
Speaker 1: economics was ill equipped to see the financial crisis coming
Speaker 1: to explain it. It didn't fit into their sort of
Speaker 1: general equilibrium models and so forth. Connect the dots for
Speaker 1: us between the sort of corner solutions that absolute requirements
Speaker 1: of the dealers to do whatever they had to do
Speaker 1: to survive another day, and the money viewers perspective on
Speaker 1: how the financial crisis came about. Um. Well, I've written
Speaker 1: a book about the financial crisis, The New Lombard Street. Um.
Speaker 1: The short answer is that to understand you're talking about
Speaker 1: the two thousand nine. Yeah. Yeah. So the way that
Speaker 1: I would understand this is that this was a test
Speaker 1: of this emerging market based credit system UM, sometimes called
Speaker 1: shadow banking UM. And the the the notion of shadow
Speaker 1: banking that I would urge UM on your listeners is
Speaker 1: to understand shadow banking as money market funding of capital
Speaker 1: market lending. It's the form of banking that's sort of
Speaker 1: natural for a modern globalized, financialized economy. UM. Where you're
Speaker 1: talking about the money market funding UM is wholesale funding
Speaker 1: in money markets UM, not deposits right as in banks. UM.
Speaker 1: And the capital market lending is is capital markets you know.
Speaker 1: This is again wholesale pricing in dealer markets UM, not
Speaker 1: bank loans you know that are that are specific to
Speaker 1: the relationship between a bank and and the borrower. UM.
Speaker 1: This is the modern form of of banking that evolved
Speaker 1: as we were globalizing, UM the market system, but we
Speaker 1: hadn't yet developed the systems for backstopping it and supporting it,
Speaker 1: and so we had a little crisis there where when
Speaker 1: you're doing shadow banking money market funding a capital market lending,
Speaker 1: that means that periodically you have to roll your funding.
Speaker 1: And if you can't roll your funding. You have to
Speaker 1: sell your asset um and that's a fire sale, and
Speaker 1: that's the liquidity aspect of it. The central banks put
Speaker 1: a floor on this crisis basically by taking the shadow
Speaker 1: banking system onto their own balance sheet, doing shadow banking
Speaker 1: on the balance sheet of the central bank, and that
Speaker 1: put a floor on it. But it took a while
Speaker 1: to to sort all this out, and meanwhile there is
Speaker 1: a bit of a crisis. So what are the implications
Speaker 1: for financial stability now? Based on your definition of shadow banking,
Speaker 1: so money market funding of capital market lending, when when
Speaker 1: most regulators talk about shadow banking, they usually use a
Speaker 1: definition that's something like financial intermediation by non bank entities,
Speaker 1: which basically sounds like it's a bunch of unregulated activity
Speaker 1: that it's probably nefarious in some way. But your definition
Speaker 1: seems much more neutral. You're basically talking about extending credit
Speaker 1: just through a slightly different channel. So how shall we
Speaker 1: be thinking of that in terms of financial stability. Well,
Speaker 1: that my definition is meant to um include that form
Speaker 1: of lending if it's even if it's on a bank
Speaker 1: balance sheet, which in most cases in two thousand seven
Speaker 1: it was on bank balance sheet in Europe, okay, but
Speaker 1: it was not on the bank balance sheet of the
Speaker 1: United States, and that had to do with regulation, okay, Um,
Speaker 1: But the economics of it was very similar whether it's
Speaker 1: on a bank balance sheet or on some other bank
Speaker 1: balance or some other balance sheet. That's why I want
Speaker 1: to use that definition, so that we're not reaffying sort
Speaker 1: of regulatory categories, but thinking about economic categories. So in
Speaker 1: in in today's world, the important place where you see
Speaker 1: money market funding of capital market lending is in fact
Speaker 1: in the emerging market. UM. As you, as I'm sure
Speaker 1: your listeners know, the the major amount of credit growth
Speaker 1: since the financial crisis has re we've been in the
Speaker 1: periphery in the emerging markets. These are these are dollar borrowers, UM,
Speaker 1: long term dollar borrowers. But the actual funding of that
Speaker 1: has been happening in the global money market dollar money
Speaker 1: market system, sometimes using for exchange swaps in order to
Speaker 1: in order to move it into domestic domestic funding in
Speaker 1: other currencies. UM. This is the system that's been building
Speaker 1: up since the since the financial crisis of two thousand seven. UM.
Speaker 1: And this is a system that it seems to me
Speaker 1: is most likely to be tested in in the next
Speaker 1: uh critical moments of the of the system, and hopefully
Speaker 1: we'll get through that and we'll find out where it
Speaker 1: breaks and we'll fix that. So that's the place that
Speaker 1: I'm watching. So let's just to spell it out for
Speaker 1: the listeners. We're talking about. Okay, money market funding of
Speaker 1: capital markets activities. You're seeing it growing in emerging markets globally,
Speaker 1: so essentially people borrowing short term overnight in dollars then
Speaker 1: using that funding for longer term projects. Talk to us
Speaker 1: about uh, you know, you're saying, this is what you're watching.
Speaker 1: What are the stresses that you're looking for, and what
Speaker 1: you know from a financial stability perspective, what kind of
Speaker 1: red flags or yellow yellow light should people be on
Speaker 1: alert for. Well, what I watch is this sort of
Speaker 1: circular loop where just imagine the following that you have
Speaker 1: a let us say a Brazilian national champion firm that
Speaker 1: is borrowing five year bond dollar bond okay um, and
Speaker 1: they're using those funds for whatever their businesses. Okay, that
Speaker 1: that bond, where does the money come from? Okay, that
Speaker 1: bond is bought let's say by some uh Asian bank
Speaker 1: that is then going to fund that in three months
Speaker 1: dollar money markets. It's borrowing from some French bank that's
Speaker 1: issuing that's buying that three month paper, which is funding
Speaker 1: in overnight repo in in in global money markets, which
Speaker 1: or maybe in the eurodollar market. And then the Central
Speaker 1: Bank of Brazil is acquiring dollar balances as its reserves.
Speaker 1: So that's you see how that's a round trip. Okay,
Speaker 1: So Brazil as a country is borrowing five year in dollars,
Speaker 1: that's its on the non financial corporate um and lending
Speaker 1: um in the in the global dollar money markets as
Speaker 1: the central bank reserves. So all of that loop work okay,
Speaker 1: until it doesn't. Their number of links right that we're
Speaker 1: looking at, and any one of those lengths that if
Speaker 1: it were to fail, would cause a would cause problems
Speaker 1: in the system as a whole that that loop has
Speaker 1: to close in order for in order for the system
Speaker 1: to be maintained. One place that loop might not close
Speaker 1: is that Brazil is is borrowing long and lending shorts, okay,
Speaker 1: and the rest of the world is is lending long
Speaker 1: and borrowing short. Thing, So the rest of the world
Speaker 1: is acting like a bank for Brazil, right, and and
Speaker 1: Brazil's source of liquidity is its deposits in that rest
Speaker 1: of the World Bank, which is which is not in
Speaker 1: the United States at all. By the way, you noticed
Speaker 1: that I haven't mentioned the United States. Okay, it's all
Speaker 1: in dollars, but it's not in the United States. So
Speaker 1: there's another little link. What is the link between the
Speaker 1: lender of last resort, the actual source of dollars, the FED, okay,
Speaker 1: and this global dollar system that is offshore. So all
Speaker 1: of these links are, they exist, there are lengths um
Speaker 1: and they will be tested. That's what financial crisis are
Speaker 1: for at some high level, to to to see if
Speaker 1: you have the proper links and to and to improve them.
Speaker 1: That we learn in each crisis where exactly is the
Speaker 1: weak link, and then we fix that link and we
Speaker 1: go on and then we find out where the next
Speaker 1: week oft link is. And this is how the system works.
Speaker 1: I've forgot to mention at the beginning. There's actually a
Speaker 1: fourth major odd thoughts topic that your research also touches on,
Speaker 1: and that is the dominance of the US dollar in
Speaker 1: the global financial system. Of course, and we've spoken to
Speaker 1: people like Hun Song Shin from the Bank for International
Speaker 1: Settlements about this centrality of the dollar in global markets.
Speaker 1: Mostly via funding markets and capital markets. As you point out, UM,
Speaker 1: I do want to talk about the repo market. But
Speaker 1: before we do, and since we're on the topic of
Speaker 1: emerging markets, what is the money view actually say about China?
Speaker 1: About China? I guess one of the things that I've
Speaker 1: said about China is that the notion that the R
Speaker 1: and B is going to be the global currency is
Speaker 1: not any time soon. UM. I think that's now the
Speaker 1: usual point of view. But when I was writing about
Speaker 1: this or five years ago, UM, maybe you remember, there
Speaker 1: was some excitement about R and B replacing the dollar. UM.
Speaker 1: But I think that's because people saw that China was
Speaker 1: a large country and they were not understanding what what
Speaker 1: what what does it mean to be a global reserve
Speaker 1: currency that all of the plumbing, all of the apparatus.
Speaker 1: Are you really prepared to do all of that stuff? Um?
Speaker 1: And the answers basically no. So the the the the
Speaker 1: the world system is still global dollar system. UM. And
Speaker 1: I I'm glad you mentioned hun Shin. UM. I learned
Speaker 1: very much from the reports of the b I S
Speaker 1: and from and from hun Shin and his whole group,
Speaker 1: so they are I view them as fellow travelers in
Speaker 1: the money view. Um, we're on the same point of view.
Speaker 1: And as I said, that's because it's a natural point
Speaker 1: of view for people who are in central banks. And
Speaker 1: what's more central banking than the b I s, it's
Speaker 1: the it's the place where the central banks I'll talk
Speaker 1: to each other. Well, so you gave that example of
Speaker 1: the Brazilian company going out and borrowing for five years
Speaker 1: maybe from an Asian bank, which then gets its funding
Speaker 1: from a French bank and so on, and as you
Speaker 1: pointed out, you could have this entire dollar system without
Speaker 1: it actually without any involvement of a US financial entity.
Speaker 1: And speaking of the centrality of the dollar, that was
Speaker 1: actually Mark Carney's speech at Jackson Hole about how this
Speaker 1: is becoming a problem so speak, because the US is
Speaker 1: becoming a smaller and smaller share of GDP around the globe,
Speaker 1: and yet the dollar and therefore the influence of the
Speaker 1: FED is taking this outside role. Does that concern you,
Speaker 1: I mean, do you share that view that ultimately there's
Speaker 1: an instability there and that the longer it goes on
Speaker 1: without some sort of next thing or post dollar multi
Speaker 1: currency world, that that creates a problem or is that
Speaker 1: more or less sustainable. I think it can work. I
Speaker 1: think it is. It is potentially sustain annable. UM. I
Speaker 1: would I would point you to a key piece of
Speaker 1: this UM at the moment are the liquidity swaps between
Speaker 1: the major central banks UM which connect the dollar with
Speaker 1: all the other currencies UM as as a backstop for
Speaker 1: this global dollar system. The fact that the United States
Speaker 1: is it is a shrinking fraction of a larger global economy, okay,
Speaker 1: does not seem to me necessarily to say that therefore
Speaker 1: we need a multi currency system or that we can't
Speaker 1: have a global dollar system. It's just that what's happening
Speaker 1: is the internationalization of the dollar, okay. UM that the
Speaker 1: dollar is not just the United States problem. It's everyone's problem.
Speaker 1: It's everyone's currency, and so it's a political challenge, I
Speaker 1: think more than an economic challenge. Like that, the management
Speaker 1: of the global dollar system is not just the Fed's problem.
Speaker 1: It's the it's the problem of all the central banks
Speaker 1: and the committee, if you will, of central banks working
Speaker 1: together to to manage the global dollar system. Them It's
Speaker 1: not just the USS dollar anymore, it's everyone's dollar. You
Speaker 1: mentioned the coordinating role of the global central banks and
Speaker 1: at Columbia. The professor Adam Two's wrote this wrote this
Speaker 1: book crashed, and it really talked a lot about the
Speaker 1: various UHC swap lines that the FED set up with
Speaker 1: other central banks to ameliorate the dollar shortage UH during
Speaker 1: the crisis. Do you worry about the politics of that? So,
Speaker 1: let's say that needed to be fleshed out. I mean,
Speaker 1: I'm trying to imagine in today's world, there's so much uh,
Speaker 1: you know, and antipathy towards globalization. UH, this twitter world
Speaker 1: we live in, whether politics could get in the way
Speaker 1: of essentially creating the plumbing fixes that would need to
Speaker 1: maintain the dollar standard on a global basis. Yes, making
Speaker 1: his work politically is I think the biggest challenge. As
Speaker 1: I said, The economics I think is pretty clear. Um,
Speaker 1: once you get out of standard economics, as I say,
Speaker 1: and you start to see this through the money view,
Speaker 1: you understand you understand what this is about. UM. You
Speaker 1: mentioned Adam too. He was my colleague when I was
Speaker 1: at Colombia, and we talked a lot about these matters.
Speaker 1: We we ran a project at the c GT together,
Speaker 1: UM and he he this foreign exchange swap. He cites
Speaker 1: my little article on foreign exchange swaps. So this is
Speaker 1: this is another fellow traveler in the money view, I
Speaker 1: would say, so this is very much compatible with UH.
Speaker 1: And he is as a historian thinking about the politics
Speaker 1: of this, Um, how is this going to be? What
Speaker 1: is this? This is a challenge. This was a global crisis, right.
Speaker 1: This was not just a domestic in the US crisis
Speaker 1: in in the subprime mortgage market. It was global money markets,
Speaker 1: global dollar money markets that froze up. That's why it
Speaker 1: was a global crisis, and it took form in different
Speaker 1: countries around the world, depending in a different form um,
Speaker 1: depending on where and how they kind of tacked to
Speaker 1: this global dollar system. That's the great thing about his
Speaker 1: book is to really make clear um the global character
Speaker 1: of this thing um and that it was global because
Speaker 1: the dollar system is global, that this crisis was a
Speaker 1: crisis of the dollar system. Well, let's talk about the
Speaker 1: repo market blow up in September, because that was another
Speaker 1: crisis in dollar funding markets that could conceivably have gone
Speaker 1: global if the Federal Reserve hadn't acted UH relatively quickly.
Speaker 1: What's your understanding of what happened in the repo market
Speaker 1: and the conditions through the money view prism that led
Speaker 1: up to it. Well, I guess I do think that
Speaker 1: zoltan Posts analysis of this is basically right. Um I
Speaker 1: would he's down in the weeds, you know, because he's
Speaker 1: dealing directly with people who are trading in this market.
Speaker 1: Let me just pull back to the feet view a
Speaker 1: little bit, thinking about what the response of regular or
Speaker 1: authorities was to the financial crisis, And to a large extent,
Speaker 1: the response has been imagining that what we really need
Speaker 1: to do is get more capital in this system. We need,
Speaker 1: we need to We're thinking about this as a solvency problem,
Speaker 1: not a liquidity problem, okay. And the way they they therefore,
Speaker 1: the regulatory apparatus UH with Dodd Frank and others responded
Speaker 1: was to try to kill unsecured money market credit and
Speaker 1: to and to emphasize secured money market credit, which is
Speaker 1: to say, to kill the Fed funds market, to kill
Speaker 1: the your a dollar market, and to focus on the
Speaker 1: repo market as a money market because repo is secured
Speaker 1: overnight money. Right, there's some some some capital asset that
Speaker 1: is collateral for this borrowing, whereas Fed funds and your
Speaker 1: a dollar are not secured. These are these are just
Speaker 1: interbank borrowing. So by shifting the emphasis in what is
Speaker 1: the instrument that you're using as a death sit agent
Speaker 1: to satis to live to fight another day, your seeing repo.
Speaker 1: There's much much more emphasis on that kind of credit
Speaker 1: now than there was ten years ago, and so the
Speaker 1: shortage of collateral can cause problems. We this is now
Speaker 1: the marginal source of overnight credit globally, so it's much
Speaker 1: more important market than than it was formally and and
Speaker 1: so all that's where the stresses are going to show up.
Speaker 1: And that's what you saw in September, that that's where
Speaker 1: the stresses showed up. It wouldn't have been so um
Speaker 1: ten ten years ago because there would have been alternative
Speaker 1: places where if you needed to borrow overnight you could
Speaker 1: And that's less so. And some of that's because of
Speaker 1: regulatory constraints. Some of that's misguided. They're not understanding that
Speaker 1: there's a liquidity dimension to this thing that you need
Speaker 1: to be you need to be paying attention to, and
Speaker 1: that just making it safe, that is to say, secure
Speaker 1: credit is safer than unsecured credit. UM, maybe making it
Speaker 1: more fragile. Explain that further, because I don't think that's
Speaker 1: an intuitive concept to people generally. But this idea, and
Speaker 1: you know, for those who haven't listened to the past,
Speaker 1: the repo market, you have to post collateral and then
Speaker 1: you get liquidity, and in theory that's safer. But what
Speaker 1: you're saying, and again this goes back to your original
Speaker 1: point that it's not about wealth constraints or budget constraints,
Speaker 1: it's about liquidity constraints or that's where the weakness in
Speaker 1: the system is. Explain how uh sort of regulators may
Speaker 1: have taken the wrong lesson from the crisis by misunderstanding
Speaker 1: the money view, and how we still have things defects. Well,
Speaker 1: some of this is about the politics of regulation, right.
Speaker 1: The the what was pushing the regulatory reform was the
Speaker 1: concern that the taxpayer not beyond the hook. Okay, And
Speaker 1: so this is about solvency. We want to make we
Speaker 1: want to make sure that the taxpayer is not is
Speaker 1: not bailing out bankers, is not we're not taking wealth
Speaker 1: from households like me, okay and giving it to large
Speaker 1: banks that have made ridiculous ridiculous best. Okay. That's the politics, right,
Speaker 1: That is about redistribution from the taxpayer to to some financiers.
Speaker 1: Who have made bad bets, and so that's why the
Speaker 1: focus was on getting more capital in the system as
Speaker 1: a buffer that you can run through that you won't
Speaker 1: have to rely on the taxpayer. That was the politics
Speaker 1: of it. Okay. However, a great deal of this crisis
Speaker 1: was not at all about UM losses. Like that. You
Speaker 1: know that there that there were capital market assets that
Speaker 1: that had a value of zero UM, and so therefore
Speaker 1: there were losses to be absorbed. These were liquidity problems.
Speaker 1: Liquidity problems which meant putting off the promise to pay
Speaker 1: until tomorrow until you can pay it so ultimately it
Speaker 1: can be paid, just not today. Okay, that's a liquidity problem.
Speaker 1: A liquidity problem is when you can't make a payment today,
Speaker 1: but you will be able to make attainment tomorrow or
Speaker 1: in a week or in three months, and you need
Speaker 1: money to bide you over UM. But that is not
Speaker 1: money that's coming from the taxpayer, because it's repaid. It's
Speaker 1: not a wealth transfer, right, it's just And so this
Speaker 1: is this is the alchemy of banking that we use.
Speaker 1: You expand balance sheets UM in order and by providing
Speaker 1: extra means of payment today which you can then pull
Speaker 1: back UM later on when when this when you get
Speaker 1: a better alignment between the pattern of cash promises and
Speaker 1: the cat pattern of actual cash flow. That's what a
Speaker 1: liquidity That's what liquidity is about. Is about maintaining that
Speaker 1: balance between the pattern across the economy as a whole,
Speaker 1: across the world as a whole of of promises to
Speaker 1: pay and the pattern across the economy as a whole
Speaker 1: across the world of whole as a whole of actual
Speaker 1: capacity to make those payments. Um and misalignment of that,
Speaker 1: that's when you have a financial crisis. Right. So, post crisis,
Speaker 1: regulators sort of focused on solvency, encouraging banks to hold
Speaker 1: all this additional capital, and maybe arguably didn't focus enough
Speaker 1: on liquidity and liquidity risks. Uh So, now we have
Speaker 1: the Federal Reserve that is injecting billions of dollars worth
Speaker 1: of liquidity into the repo market. There's some talk also
Speaker 1: about creating a standing repo facility. This is something that
Speaker 1: I think it was Bill Dudley mentioned recently, what's your
Speaker 1: preferred solution to repo market vulnerability at the moment. So again,
Speaker 1: thirty thousand feet, let's back up. We've been shifting from
Speaker 1: a bank lending credit system to a market based credit system.
Speaker 1: These proposals that you're talking about are an attempt to
Speaker 1: adapt the modern operations central banking to this new market
Speaker 1: based credit system by operating in the instruments that the
Speaker 1: market based credit system is using. So those two examples
Speaker 1: you gave um that the FED can inject new liquid
Speaker 1: more liquidity um, which it has done by by engaging
Speaker 1: with dealers um. Or it could create a repo facility.
Speaker 1: This is what we call in the economics of the
Speaker 1: dealer function, the difference between the inside spread and the
Speaker 1: outside spread. The the repo the repo facility that you're
Speaker 1: talking about is an outside spread. It's saying if you
Speaker 1: if there's a problem in the repo market, the FED
Speaker 1: will do repo with you, but at an unfavorable price.
Speaker 1: You know, it will go either way, it will. It's
Speaker 1: a it's a like a by cell spread that the
Speaker 1: FED is offering away from the market price. So normally
Speaker 1: it's like the discount rate for for the bank lending system.
Speaker 1: That's that's essentially what this is is an analog to
Speaker 1: the discount window, but for the market based credit system,
Speaker 1: that's what that's what this report facility is intended to
Speaker 1: be exactly how to run that so that it doesn't
Speaker 1: cause moral hazard problems. You know, we have a hundred
Speaker 1: years of experience running a discount window in order to
Speaker 1: make that work. We're just making it up right now
Speaker 1: for the market based credit system. So it we can
Speaker 1: learn things from the past. But but we need to
Speaker 1: be a little humble and appreciate that we're inventing some
Speaker 1: new thing for this new globalized market based credit system.
Speaker 1: That's the context of these of these proposals. UM. The
Speaker 1: right thing from my point of view, for the most
Speaker 1: important thing for a central bank to be focusing on
Speaker 1: is the dealer of last resort function. That it that
Speaker 1: it is a backstop to prevent financial crises. That and
Speaker 1: so that's why this repo facility to me, is the
Speaker 1: more important thing. UM. When the when the set is
Speaker 1: trading with the market, um injecting and and and pulling out.
Speaker 1: It's operating at the insides, but it's operating at the
Speaker 1: market price, but the outside spread, which is its promise.
Speaker 1: It's it's facility that usually in normal times doesn't get
Speaker 1: used at all. It's just standing there and dealers know
Speaker 1: it's there, and so they know that if there's a problem, um,
Speaker 1: that's the price that they're going to have to pay
Speaker 1: to get liquidity, and it's not a nice price. So
Speaker 1: they try to organize their books and their business so
Speaker 1: they don't have to go there. But if they have
Speaker 1: to go there, they can go there. I want to
Speaker 1: just step back for a second to something you said,
Speaker 1: because I have a feeling there's a lot of people
Speaker 1: who disagree, and I'm curious how you addressed it. When
Speaker 1: you're talking about the crisis, You're like, Okay, regulators really
Speaker 1: put a high emphasis on capital requirements and making sure
Speaker 1: that banks are solvent, and that really they sort of
Speaker 1: neglected the role of illiquidity in the crisis, And I
Speaker 1: think in the popular conception, everyone would be like, look,
Speaker 1: I saw that movie where they made really stupid loans
Speaker 1: two people in Florida, and the loans were bad, and
Speaker 1: obviously bankers were doing all these uh ninja loans and
Speaker 1: sub prime borrowers, and obviously in the popular concept, it's
Speaker 1: not about liquidity but just about bad underwriting and greed
Speaker 1: and all that. How do you if someone were to
Speaker 1: say that to you, how do you make the case that, yes,
Speaker 1: that may all have existed, but still it really was
Speaker 1: in large part a liquidity problem as opposed to a
Speaker 1: capital shortfall problem problem. Well, I would say that person,
Speaker 1: it's I've seen those movies too, Okay, And all of
Speaker 1: that is true. All of that happened, and in exuberant periods,
Speaker 1: crazy things happen, um, and an illegal things happen, um,
Speaker 1: And you need to clean that up. Okay, But that
Speaker 1: doesn't necessarily lead to a global financial crisis. Okay. That
Speaker 1: happened to be the trigger, okay, but it actually was
Speaker 1: not the substance of the of the global financial crisis.
Speaker 1: If all it had been was just a subprime mortgage crisis,
Speaker 1: there wouldn't have been a global financial crisis, um. And
Speaker 1: we would have been able to clean that up. And
Speaker 1: in cleaning that up, you do need to fix underwrite,
Speaker 1: you do need to to to change some of that regulation.
Speaker 1: All of that was a reasonable reaction to a subprime
Speaker 1: evolution that got out of hand and ninja loans and
Speaker 1: all of that. Um. So I agree with all of
Speaker 1: that that that it wasn't that that that cleaning that
Speaker 1: up was was useless. It's just that cleaning that up
Speaker 1: was not all you needed to do. And it's and
Speaker 1: cleaning it up is not going to prevent another global
Speaker 1: financial crisis because what actually caused the global financial crisis
Speaker 1: was the freeze up in global funding markets, and that
Speaker 1: was a liquidity crisis largely. It was caused, I mean,
Speaker 1: if you want to get down into weaves about this,
Speaker 1: by the fact that a lot of these securitized mortgages
Speaker 1: were funded overnight, you know, on the balance sheet of
Speaker 1: of Deutsche Bank and UBS in Europe, okay, and they
Speaker 1: then couldn't roll their funding, and they couldn't roll the
Speaker 1: funding for that, They couldn't roll the funding for anything.
Speaker 1: Global money markets froze up, and so there was contagion
Speaker 1: across the whole world. That's what you need to need
Speaker 1: to make sure it doesn't happen that if you have
Speaker 1: a problem in some little area like subprime mortgages, it
Speaker 1: doesn't lead to a global financial crisis. You just deal
Speaker 1: with that little area and meanwhile put a floor under
Speaker 1: the under the system as a whole so that it
Speaker 1: doesn't proliferate. Um. It did deliferate, right, that's what we saw.
Speaker 1: The politics of it meant that you could, um, you
Speaker 1: could focus on the subprime cleaning that up, and we did,
Speaker 1: and that's what And putting more more capital in banks
Speaker 1: allows them to take losses if they make back bad loans.
Speaker 1: That's all fine, okay, But but by itself, that's not
Speaker 1: what caused what what led to the to the global
Speaker 1: financial crisis. You may you may even remember at the
Speaker 1: I mean I remember I was around when it was happening.
Speaker 1: There were many economists who who shall me remain unnamed,
Speaker 1: who who said when the when the subprime market was
Speaker 1: melted down, don't worry about this. This is small money
Speaker 1: compared to the size of the mortgage market as a whole.
Speaker 1: It's small money compared to the size of capital markets
Speaker 1: as a whole. It will it's just pennies on the dollar.
Speaker 1: We can absorb this. They were right about that, but
Speaker 1: that didn't mean that it didn't cause a global financial
Speaker 1: crisis because of the interactions between that little crisis and
Speaker 1: and and everything else, which they did not realize. They
Speaker 1: were not right about that that this was not a
Speaker 1: wealth problem. If it was a wealth problem, it would
Speaker 1: have been easily solved because it wasn't very big. You know,
Speaker 1: there were there was a lot of skullduggery, but it
Speaker 1: wasn't very big compared to the size of the global market,
Speaker 1: and so it seems like we should be able to
Speaker 1: absorb this if it's just a wealth crisis. But it wasn't.
Speaker 1: It was a liquidity crisis, and it was a global
Speaker 1: aquidity crisis. That's that's the piece of it that you
Speaker 1: couldn't see looking at it from standard economics. But if
Speaker 1: you knew how these things were being funded in the
Speaker 1: shadow banking system, money market funding of capital market lending,
Speaker 1: then you knew there was going to be a lot
Speaker 1: more to this. It wasn't just about a wealth transfer
Speaker 1: from people making god loans, um. You were going to
Speaker 1: have a problem with rolling this funding. And it was,
Speaker 1: and that's exactly what happened. It got a lot worse.
Speaker 1: That's why economists didn't see it right because they weren't
Speaker 1: paying attention to the plumbing. They were thinking of this
Speaker 1: as as as a wealth problem, not as a liquidity problem.
Speaker 1: And it was a wealth problem in part, okay, but
Speaker 1: that's not what caused the crisis. It was a liquidity
Speaker 1: problem that caused the crisis. Professor Perry Merling, thank you
Speaker 1: so much for being on odds. I just gotta say, uh,
Speaker 1: you know when I whenever I put out something on
Speaker 1: Twitter saying who should we have on odd lots, your
Speaker 1: name for like the last several months as all or
Speaker 1: last year maybe is always one of the most frequent responses.
Speaker 1: So I'm really glad we finally made it. Well. Um,
Speaker 1: probably that's because, as you know, I have this online
Speaker 1: course on course Era. So there's now half a million
Speaker 1: people who have gone through that class and they so
Speaker 1: they think about the world in this money view way, um,
Speaker 1: but they don't see it in the media very much,
Speaker 1: and so it's there. That's what they're pushing for. They're
Speaker 1: pushing to see uh, that language moving into more more
Speaker 1: more common usage. I'm gonna go ahead and take the course,
Speaker 1: Sarah course, and I'm glad that it's free. Joe, It's free.
Speaker 1: I know I'm gonna do it, I promised. Thank you.
Speaker 1: That was great, Well, thank you for having me. Well, Joe,
Speaker 1: I really enjoyed that conversation. As I said in the intro,
Speaker 1: it's sort of brought together a lot of major macro
Speaker 1: themes that we've seen on all thoughts recently. Uh, and
Speaker 1: I named a few, but we even got a bonus
Speaker 1: fourth one, which was the premisee of the dollar in
Speaker 1: the global financial system. Yeah, no, I totally agree. I
Speaker 1: feel like that was no It's like, no wonder so
Speaker 1: many people have we've told us that we needed to
Speaker 1: have Perry on because it really does. His work touches
Speaker 1: on basically all of our big topics here. But I
Speaker 1: really like that because obviously we recently, uh you know,
Speaker 1: we talked to Skidelski recently about the failure of economists
Speaker 1: to understand money, and I feel like, uh, Perry was
Speaker 1: really able to drill down on this idea and put
Speaker 1: some sort of meat on the bone about how important
Speaker 1: it is to understand to place money at the center
Speaker 1: of our understanding. So certainly if you follow finance, or
Speaker 1: if you're involved in finance, and if you were in
Speaker 1: any way following it back in two thousand eight, when
Speaker 1: we have the financial crisis, this money view understanding of
Speaker 1: everything just feels kind of intuitive. And I actually like
Speaker 1: disagree with your last point about how lots of people
Speaker 1: are going to think this is about insolvency and the
Speaker 1: subprime crisis and greedy banks. It's definitely part of it.
Speaker 1: But people who were following the issue very very closely
Speaker 1: will know that it was actually caused by a massive
Speaker 1: crunch in the shadow banking system and in the repo market.
Speaker 1: And I don't know if you remember, but a previous
Speaker 1: All Boughts guest, Matt King from City Group actually wrote
Speaker 1: that amazing note in early September two tho, all about
Speaker 1: repo market funding and how it was going to end
Speaker 1: in tears for the broker dealers. Yeah. No, I mean,
Speaker 1: certainly people who who were in the weeds on this
Speaker 1: stuff or reported obviously understood the or many of them
Speaker 1: I don't know actually if it's obvious, but many of
Speaker 1: them did understand the centrality of the money market and
Speaker 1: in short term funding to the crisis. But I still
Speaker 1: think in the popular conception, and you know, as Perry
Speaker 1: pointed out, and I think it's really important, um in
Speaker 1: all these fixes or you can't ignore the politics of this.
Speaker 1: And because in the popular conception, the crisis was about
Speaker 1: greedy bankers making bad loans to people in Florida with
Speaker 1: no jobs or no income, that did have a very
Speaker 1: big impact on what the post regulation landscape looked like,
Speaker 1: perhaps to our detriment, and perhaps the reason why we
Speaker 1: still see these fragilities in the system. Yeah, for sure.
Speaker 1: This has been another episode of the All Thoughts podcast.
Speaker 1: I'm Tracy Alloway. You can follow me on Twitter at
Speaker 1: Tracy Alloway and I'm Joe wi isn't thought you could
Speaker 1: follow me on Twitter at the Stalwart. And you should
Speaker 1: follow Perry Maryland on Twitter. His handle is at p
Speaker 1: Maryland and check out his Coursera course. I'm going to
Speaker 1: do so because it's free, and be sure to follow
Speaker 1: our producer on Twitter, Laura Carlson. She's at Laura M. Carlson.
Speaker 1: Follow the Bloomberg head Of podcast on Twitter, Francesca Leavy,
Speaker 1: She's at Francesca Today, and check out all of the
Speaker 1: Bloomberg podcasts under the handle at podcasts. Thanks for listening,
Speaker 1: O