Into the Unknown
Economics of Money and Banking Columbia University This full-semester course is a masterpiece! It definitely will change the way how you see this world. Modern monetary system is way more complicated than you might expect. I spent about one year to complete this course, have written 13 posts, and there were so many times that…
Shadow banking is “money market funding of capital market lending”. Financial globalization and the revolution of modern finance are behind this. Shadow banking is a system has global funding, because it’s the global dollar money markets, of local lending, because the loans are originated for some local purpose. Very different from standard banking, prices are…
Interest Rate Swaps The interest rate swap come into being because of certain kinds of market imperfections that one borrower has access to low cost funding in their local area (for instance, because their government likes them) and no one else has access to that. And so they use that access as a source of…
Economy is coherent, it has structure to it. The discipline of the clearing constraint that forces people, whether they want to or not, to pay attention to their little place in the larger system. The money rate of interest is a symptom of the state of the larger system. There’s another way in which people…
Shadow banking refers to money market funding of capital market lending. We essentially need to extend the money view for the money market to the capital market, to the prices of risk. Traditionally, to most people, the bank’s balance sheet is like this. In the balance sheet, Capital is the FDIC solvency backstop, Reserves is…
International Transaction in 19th Century Suppose we have a surplus country which is selling goods and receiving bills of exchange (the promise to pay in 90 days from a deficit country) as payments. On the other side of the trade, the deficit country buys the goods and issuing the bill of exchange. However, the bill…
We have been thinking the hierarchy of money, with reserves (or currency which is the liability of the central bank) being the best money. Some where below that in the hierarchy, there are Fed funds, which are promises to pay reserves by banks. Further below that is the Eurodollars, which are international dollars promising to…
Funding liquidity is the ability to raise money. Market liquidity, on the other side, is the ability to quickly buy or sell assets in volume without moving prices. Some assets are more liquid than others. A liquid market is a market with a continuous price, which might be fluctuating but there’s no hops. Where does…
Repo Market Repo (someone calls it RP) is an overnight collateralized loan, organized as a simultaneous sale and repurchase of a security. The person A, who borrowing money, is selling a security (say, treasure bill) to somebody B today and promising to buy it back tomorrow. Repo is collateralized in a sense on both sides:…
Recall the hierarchy of money, the Fed is sort of at the top, it can create this high powered money called reserves. From the point of view of the banks, reserves are money. Fed funds are NOT either the liability or the asset of the Fed, they’re the asset and the liability of banks. Federal…
It is unusual to think about banking as a system of payments, and central banking as a clearing house. One big picture idea is to think of all of the institutions in monetary system as an attempt to make the system work as if it were one big bank, instead of a bunch of little banks. The One…
Hyman Minsky had something called financial instability hypothesis, suggesting that there was something inherently unstable about financial system and that the role of the central banks is to kind of put bounds on that and prevent it from flying off into space. Flow of Funds Flow of Funds is a set of accounts that was…
A few things about Allyn Young He goes against economic orthodoxy. There are 3 dimensions where he is engaging with the economics. There are 3 more dimensions where he engages with the outside world: Civil War Finance Government is fighting a foe and it has to mobilize as many resources as possible in order to…
Banks There are sorts of 2 issue arise when we are thinking about banks: There is a link between the solvency and the liquidity. Shadow banks. Balance sheet of a shadow bank may looks like below, and this model has became a dominant one in this world. Assets Liabilities Residential mortgage-backed securities (RMBS)Interest rate swap…