The last three or four decades have seen a remarkable evolution in the institutions that comprise the modern monetary system. The financial crisis of 2007-2009 is a wakeup call that we need a similar evolution in the analytical apparatus and theories that we use to understand that system. Produced and sponsored by the Institute for New Economic Thinking, this course is an attempt to begin the process of new economic thinking by reviving and updating some forgotten traditions in monetary thought that have become newly relevant. Three features of the new system are central. Most important, the intertwining of previously separate capital markets and money markets has produced a system with new dynamics as well as new vulnerabilities. The financial crisis revealed those vulnerabilities for all to see. The result was two years of desperate innovation by central banking authorities as they tried first this, and then that, in an effort to stem the collapse. Second, the global character of the crisis has revealed the global character of the system, which is something new in postwar history but not at all new from a longer time perspective. Central bank cooperation was key to stemming the collapse, and the details of that cooperation hint at the outlines of an emerging new international monetary order. Third, absolutely central to the crisis was the operation of key derivative contracts, most importantly credit default swaps and foreign exchange swaps. Modern money cannot be understood separately from modern finance, nor can modern monetary theory be constructed separately from modern financial theory. That's the reason this course places dealers, in both capital markets and money markets, at the very center of the picture, as profit-seeking suppliers of market liquidity to the new system of market-based credit.
Limits on Central Banking: Internal vs. External Drain
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Economics of Money and Banking
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从本节课中
Banking as Market Making
"Market liquidity" is supplied by dealers who stand ready to absorb temporary imbalances in supply and demand by taking the imbalance onto their own balance sheets, for a price. From this point of view, banks can be considered a special kind of dealer, since they absorb imbalances in payment flows. The first lecture is meant to build intuition by using our familiar balance sheet method to make sense of how this all worked in a system much simpler than our own. The second lecture introduces a formal model of the economics of the dealer function, which we will be using throughout the rest of the course.
与讲师见面
Perry G MehrlingProfessor
Economics, Barnard College
So this is a choice, a policy choice.
And the bank can do that because it's sitting at the top, okay?
But the bank itself, that's, so this is the
issue of internal drain and the art of central banking.
[SOUND]
So if notes are draining out of the
banking system into, into the arms of firms.
Okay.
So the banks don't have enough reserves or so forth, that's an internal drain.
And the Bank of England, can can ease the internal drain by
letting loose of it's own notes, and by creating good substance for them.
Okay, in both cases.
Or it, or
it doesn't, it can choose, what it thinks is best, for the economy.
But it certainly is able to do this, there's no problem.
The problem comes with an external drain. Of notes
and ultimately
gold.
Okay. If it's foreigners.
Who want notes. If it's foreigners, they want gold.
Then the Bank of England has to give them gold.
And when the bank, the Bank of England faces discipline, above it.
The Bank of England may be the, the, the money market
in London may be the center of the world money market.
Okay?
But the Bank of England ultimately is one central bank, and there are others.
And if those central banks are unwilling to accept deposits at,
at the Bank of England as the equivalent of notes and they demand gold.
Then the Bank of England has to give in gold, this is the gold standard
and this is the other reason.
So, so this thing here, looking up in the hierarchy, the central bank faces
this same constraint that other banks do, which is to say, if it's losing gold.
If it's cash, it's measuring cash flow, gold in, gold out.
Right?
And remember, it's this is the center of the world financial system,
so you're discounting all the bills in the world and you're getting
repaid from all the bills in the world.
So, there's a gold in gold out thing that's going on at the, at the
level of the country as a whole and the Bank of England is where that happens.
And the Bank of England can raise its
discount rate when it wants to discourage discount.
What does that do?
Just like a bank's lower below. It says, please don't come to me.
You know, to discount and then take the gold out of my country.
Go to France.
You know, go, go to the bank of, go to another bank, right?
Just like the banks below, say don't come to
me, go to, you know, go, go down the road.
So the Bank of England can do this and,
and, one, one of the, it could, it could orient.
And it has to focus on this, it has to pay attention to this.
There's a discipline here in the system that the Bank of England itself faces.
Because if it doesn't, what happens?
Bank of France. Oh, I, I took down the slide there.
it can lose all its gold.
It can, and, and will have to go, will have to suspend payments.
And say, you know, I promised you this note was convertible into gold.
And it will be.
Later, just not now, okay, and occasionally, every now and
then, the Bank of England has to do things like that.
So this tension, this stress in the
system, this flow, cash inflow, cash outflow.
I'm trying to tell you a story here about
how it's managed, how it's managed in a decentralized way.
By individual banks attending to the in, outflow
and inflow of notes on their own balance sheet.
Individual banks, moving the discount rate up and down, deciding to rediscount,
you know, all of those things, but they're watching the cashflow.
That leads to a market rate of interest.
And then above them, you have central banks doing
the same thing, moving discount rates up and down.
Okay.
The Bank of England used to say, there used to be a saying.
I think it was, was it 3% or was it 6%?
you could draw gold from the moon, okay, if you,
if you if you pay a high enough rate of interest.
What is the Bank of England doing when it's drawing gold from the moon?
It's saying, I'm going to charge
an awful lot for discounts. Okay.
So, people don't come.
And so they repay their bills. Because
[UNKNOWN]
don't come in, there's a, there's a shift toward repayment of,
of maturing bills and all of those are repaid in gold.
And there are no new bills, so there's no gold that flows out again.
Okay, they drawing of gold from the moon involves
a contraction of credit, that's what that is, okay.
Its a contraction of credit that the bank of
England can use in order to secure its position here.
And to maintain par
in the gold market.
So the central bank, the Bank of England, Badgett's world.
Okay?
Is, is a source of potential elasticity looking down.
Okay?
But it faces its own constraint looking up.
Okay?
In the, in the, in the gold standard.
Okay?
Looking down, looking up, at, at its position in the world.
Young makes a very, you know? This, have a look at that chapter again.
Makes a very big point that the whole word
monetary system is being run on very little gold.
Okay, because the gold that's actually being used,
okay, is the gold in the banking department, okay.
The rest of the gold is sort of locked up,
just back in the notes, you know, it's not flowing anywhere.
The gold that flows, is the gold that's in the banking department, and
there's not very much of it. Why are they able to do this?
Because of the sophistication of the money market.
Okay. That if you need gold.
You can borrow, you can borrow it from other central banks.
There's realtions between central banks.
And this is the point looking up now.
Just as when, when this bank ran into trouble, okay, he
could borrow from other banks, the same is true of central banks.
If central
banks were all willing to borrow and lend reserves, gold
to each other okay, they could jointly relax this constraint.
Right.
Just as banks that are willing to borrow and lend in the
Fed funds market right can, can relax the survival constraint that's facing them.
But will they?
And what are the institutional mechanisms to enforce that, and to encourage that?
Okay?
Monetary economists always speak about central bank cooperation,
but central bank cooperation also involves sort of
national interests, and the, and the interference of
politicians and finance ministers, and that sort of thing.
It's easier said than done.
This cooperation among, among central banks that's required and if you
don't get cooperation with the central banks, what do you get?
You get the survival constraint binding on the
sub central banks.
The central banks, and a central bank that has a binding survival constraint on its
own balance sheet has no choice but to raise, raise interest rates.
Has no choice but to raise interest rates even if the
consequence of that is to crunch all the banks underneath it.
So, if the central bank itself is facing discipline
it's going to, it's going to transmit that discipline down, down.
Does this sound familiar to you? Things like this happening in the world?
Yeah.
So, the central bank is in, is in
an interesting position, it's, it's, it's in between.
It's in, it's, it's, it's, it's not at the absolute top, it faces it's own
survival constraint which it can relax if
it can deal with other, other central banks.
It can impose discipline on the banking system below it.
It doesn't have to unless it, it, it has discipline imposed on itself.
Okay.
These are matters of, of policy.
This is the world that Badgett knew. Okay.
And it's not so different from our own world, actually.
Okay.
But it's a quite a different way of thinking about what central banks do.
We're used in monetary you know we, we do macro or something.
You have ISLM, you're thinking about moving the interest rate
in order to encourage aggregate demand, or something like this.
This is where it all started. Where it all started was this.
Thinking about the role of, of the central bank.
Bank rate, market rate and dealing with the survival constraint.
this decentralized way of sending messages about where you
are and what is the state of the system.
When the market, money market rate gets bigger, gets
higher okay, that means there's strasses in the system somewhere.
This is like a A
reliable indicator of the state of the economy
is, is the, is the money rate of interest.
That's what people watched all the time.
You know, because everyone was in this business.
These firms are, are watching this.
They're, they're trying to decide.
Maybe I should hold some notes, okay, or maybe things,
maybe I should own earn hold earnings assets, you know.
Am I going to need to safeguard my liquidity,
you know what what, they are watching this very,
very closely.
and that what's coordinating the economy as a whole,
and that is what's coordinating the world as a whole.
Because the lending money market is the world money market, at that time.
It's enough to make you think the money market
is God, and want to really watch it closely.
Hence, Lombard's book.
People bought this book. It was a best seller.
It was a best seller.
the money market was very present in everyone's life in the 19th century.
In 19th
century Britain.
