Economics of Money and Banking MOOC

Perry Mehrling's Money and Banking MOOC

May 2021 - September 2021

We're spending summer of 2021 working through Perry Mehrling's Money and Banking MOOC. Deepen your understanding of the "money view"!

Study Group

Discuss the course through the r/moneyview subreddit.

Description

A group of us is working through Perry Mehrling's iconic Money and Banking MOOC starting the week of May 17th, 2021 and running for 13 weeks. Many of us have taken the course before, and we are looking to gain a deeper understanding of the material.

Mehrling's money view framework connects banking to finance by emphasizing cashflows, liquidity, hierarchical money, dealer-based markets, and market-based credit. This approach represents a departure from how money and banking has previously been taught.

All of the lectures and readings are accessible for free. You don't have to pay for the course on Coursera unless you want your quizzes/tests to be graded, and/or you want a certificate at the end.

In addition to the Coursera MOOC platform, the lecture videos and lecture notes are available through Mehrling's BU site. The videos are available as a YouTube playlist.

Except for the first and last week, we will cover two lectures and one reading per week. Each lecture is about an hour and 15 minutes long, and broken into several video segments.

We are watching the lectures on Mondays and Wednesdays, starting with the first lecture on Wednesday, May 19th. The readings will be due on Fridays, starting May 28th.

Questions and discussion happen primarily via Reddit:

We will link a new thread from the above master post for discussing each lecture and each reading as we get to them

We will also meet via Zoom every Thursday at 2pm EDT to discuss the lectures and readings.

As an enhancement to the material, we are adding Borja Clavero's color-coded payment notation to the balance sheets from the lectures.

  • Yellow — Payment by assignment (Passing an asset to another balance sheet)
  • Green — Payment by issuance (Issuing a new liability)
  • Red — Payment by set off (Repaying a liability that is owed)
  • Blue — Payment by novation (Receiving a liability from another balance sheet)

Below is a sample color-coded balance sheet from Lecture 6.

Lecture 6 Balance Sheet

The lectures for this MOOC were originally recorded in the fall of 2012. Much has changed since then. Not only does Mehrling's money view framework remain relevant, but it can also help us make sense of those changes.

To help us stay current, we explore some of Perry Mehrling's more recent papers and talks when appropriate.

UPCOMING EVENTS

Online

29 Jul 2021

Webinar

2021 Week 11 — Lectures 19 & 20, Reading 10

We're discussing the following for week 11: Lecture 19: Interest Rate Swaps NOTE: Part 4 of this lecture is missing from Perry Mehrling's site and the YouTube playlist. Here's a direct link.Part 4: What is a Swap Lecture Notes Selling an IRS is like borrowing in the repo market to finance the holding of a longer-term asset (corporate bond). But it's also like being long a portfolio of FRAs. A swap dealer is like a dealer in corporate bonds. Lecture 20: Credit Default Swaps NOTE: Part 4 of this lecture is cut short on Perry Mehrling's site and the YouTube playlist. For the full segment, watch through the Coursera site. Here's a direct link.Part 4: What is a Credit Default Swap (CDS)? Lecture Notes IRS is a swap that's equivalent to borrowing long and lending short. CDS is a swap that's a bit like borrowing "risky" and lending "safe." You pay more interest on your notional "borrowing" than you get on your notional "lending." Regardless of any changes in the value of the underlying bond, you just pay the interest-rate spread for a period of time. Reading 10: Excerpts from a 1952 report to the FOMC (parts one, two, and three) Study QuestionsThe Fed is figuring out how they want to run monetary policy after the Treasury-Fed accord of 1951. The report gives us a snapshot of the inner workings of the FOMC, and what the money market and monetary policy looked like at the beginning of the 1950s. It is largely concerned with how to ensure a deep and liquid market for government securities (Treasuries) and the preface explains why this is an important policy objective. Money and Banking Summer 2021 Reddit Master Thread

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Online

5 Aug 2021

Webinar

Week 12 — Lectures 21 & 22, Reading 11

We're discussing the following for week 12: Lecture 21 Shadow Banking, Central Banking, and Global Finance Lecture SlidesEverything in the shadow-banking system is a market price. Derivative dealers and their swap books are central to the modern market-based shadow-banking system. It's the derivative dealers who need a backstop. Lecture 22: Touching the Elephant: Three Views Lecture NotesThe economics view explains how the past determines the present. The finance view explains how the future determines the present. The money view explains how the present—by virtue of the pattern of cashflows being locked in—determines the present. Evolution from Fischer Black: Market liquidity is not free. It comes from the dealer system. And the dealer system depends on funding liquidity, which comes from the central bank. Reading 11: *Bagehot Was a Shadow Banker: shadow banking, Central Banking, and the Future of Global Finance by Mehrling, Pozsar, Sweeney, and Neilson (2014) NOTE: The above link is the final published 2014 version of the paper instead of the 2013 version included in the Coursera materials. Mehrling says that this paper supersedes the content from Lecture 21. Study QuestionsA big thing that this article brings in over and above Lecture 21 is the comparison to Bagehot's world, which we learned about in Lecture 9. Money and Banking Summer 2021 Reddit Master Thread

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Online

12 Aug 2021

Webinar

Week 13 — Review and What's Next

To wrap up this run-through of the MOOC, we'll we'll review any remaining questions and thoughts people, including comments and replies from the Reddit discussions. Did we get what wanted out of the experience? What's next? What else is there to read and learn? What questions have we yet to answer? Money and Banking Summer 2021 Reddit Master Thread

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PAST EVENTS

Online

20 May 2021

Webinar

Week 1 — Lecture 1, Introductions

Welcome to Money and Banking! In addition to introducing ourselves, introducing the course, and sharing our intentions for working through the material (again), we will discuss: Lecture 1: The Four Prices of Money Lecture NotesThis lecture provides motivation, context, and themes for the Money and Banking MOOC. Money and Banking Summer 2021 Reddit Master Thread

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Online

27 May 2021

Webinar

Week 2 — Lectures 2 & 3, Reading 1

We're discussing the following for week 2: Lecture 2: The Natural Hierarchy of Money Lecture Notes This lecture provides an overview of the whole course. If you've done the MOOC before, it should feel familiar. Lecture 3: Money and the State: Domestic Lecture Notes We practice the balance sheet notation by using it to describe Civil War finance and features of the US banking system leading up to the creation of the Fed. Reading 1: Four encyclopedia chapters by Allyn Young Study QuestionsYoung, writing in the 1920s has a particular perspective on the nature of money and credit, as well as the purpose of banking. Money and Banking Summer 2021 Reddit Master Thread

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Online

3 Jun 2021

Webinar

Week 3 — Lectures 4 & 5, Reading 2

We're discussing the following for week 3: Lecture 4: The Money View, Micro and Macro Lecture NotesSources and Uses. Flow of funds. Every use of funds has a corresponding source on its own balance sheet (micro) and on someone else's (macro). Assets and liabilities represent commitments of future cashflows. Lecture 5: The Central Bank as a Clearinghouse : Lecture NotesThe central bank knits the payment system together by making it behave as if it were one big bank. Reading 2: The Vision of Hyman P. Minsky by Perry Mehrling Study QuestionsMinsky put the problem of liquidity front and center. This reading is very much tied to the content of Lecture 4, which talks about the survival constraint—An any given point in time, every economic agent must maintain a balance between its cash commitments and its cash inflows. If you can't meet your cash commitments, then you're done. "Liquidity kills you quick." Money and Banking Summer 2021 Reddit Master Thread

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Online

10 Jun 2021

Webinar

Week 4 — Lectures 6 & 7, Reading 3

We're discussing the following for week 4: Lecture 6: Federal Funds, Final Settlement Lecture NotesThis lecture describes a stylized version of the US payment system, and how the Fed Funds market (interbank lending) used to allocate reserves among the banks before 2008. Lots of great balance-sheet practice for understanding how a credit-based payment system can work. Lecture 7: Repos, Postponing Settlement Lecture NotesA repurchase agreement (repo or RP) is a form of short-term market-based collateralized credit that allows non-banks to buy and sell liquidity, and operate like a payments system. Reading 3: The Check System, a chapter from Chapters on the Theory and History of Banking by Charles Dunbar Study QuestionsThis is a description of the checking system in the US in the late 19th century. We still had to make the payments system go even before we had the Fed. Money and Banking Summer 2021 Reddit Master Thread

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Online

17 Jun 2021

Webinar

Week 5 — Lectures 8 & 9, Reading 4

We're discussing the following for week 5: Lecture 8: Eurodollars, Parallel Settlement Lecture NotesEurodollar time deposits help us think about using balance sheets to line up cash inflows and cash commitments. The forward rate agreement (FRA) and the forward exchange contract give us some practice using implicit balance sheet arrangements to describe derivatives. The failure of forward interest parity (FIP) and uncovered interest parity (UIP) presents a mystery. Lecture 9: The World That Bagehot Knew Lecture NotesAn international monetary system is more straightforward when there's an international monetary standard. In the 19th century, that standard was gold. What insights can we draw from Bagehot's time to apply to the globally financialized world of today? Reading 4: Chapter VII of Lombard Street by Walter Bagehot Study QuestionsBagehot rule. Though divided into an Issue Department and a Banking Department starting midway through the 19th century, the Bank of England managed the equivalent of a single centralized reserve through the second half of the 19th century. Connects up with Lecture 9. Money and Banking Summer 2021 Reddit Master Thread

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Online

24 Jun 2021

Webinar

Week 6 — Lectures 10 & 11, Reading 5

We're discussing the following for week 6: Lecture 10: Dealers and Liquid Security Markets Lecture NotesIntroduction to the Treynor model of the economics of the dealer function. Inventories absorb order flow mismatches. Market liquidity vs. funding liquidity. Matched book vs. gross exposure. Arbitrage and brings liquidity. Lecture 11: Banks and the Market for Liquidity Lecture NotesGeneralize the Treynor model to banks (a.k.a. money dealers). Why is it profitable for banks to run the payment system at par when there's no bid/ask spread? How the Fed manages interest rates (floor vs. corridor system). The evolution of shadow banking. Reading 5: Three chapters from A Market Theory of Money by John Hicks (1989) Study QuestionsHicks reinforces some of what we've already learned in the course so far, namely that banks are a kind money dealer. But he also ties the function money to the "real" side of the economy—the market for goods and services—which Mehrling tends not to emphasize. Money and Banking Summer 2021 Reddit Master Thread

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Online

1 Jul 2021

Webinar

Week 7 — Lecture 12, Midterm Review, Reading 6

We're discussing the following for week 7: Lecture 12: Lender/Dealer of Last Resort Lecture NotesIn 2008, the shadow banking system collapsed onto the conventional banking system, which was ultimately backstopped by the Fed. A central bank can go from being a lender of last resort (funding liquidity) to a dealer of last resort (market liquidity) in the money markets and even the capital markets. Midterm Review: Review of Part 1 NOTE: These videos are not available on the BU site or the ColumbiaLearn YouTube playlist, but you can access them directly through the Coursera site or through the playlist that I linked to above. After a brief overview of the origin of the Fed and and central bank operations during normal times versus crises, Mehrling takes questions from the students on war finance, forward parity and more. Reading 6: The Economics of the Dealer Function by Jack Treynor Study Questions Money and Banking Summer 2021 Reddit Master Thread

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Online

8 Jul 2021

Webinar

Week 8 — Lectures 13 & 14, Reading 7

We're discussing the following for week 8: Lecture 13: Chartallism, Metallism, and Key Currencies Lecture NotesNote: Mehrling uses the term "forward interest parity" in this lecture to describe what he called "covered interest parity" in lecture 8, *and in the notes for this lecture. In lecture 8, forward interest parity was about locking in rates for future borrowing using forward rate agreements (FRAs).* This lecture examines the base money that sits at the top of a domestic money-credit hierarchy. Chartalism says that the value of base money comes from the state and its laws and institutions. Metallism says that the value of base money comes from the intrinsic value of the underlying metal. Which one is right? Both? Neither? Lecture 14: Money and the State: International Lecture NotesExtending the money view to international monetary systems. This lecture frame this week's Robert Mundell in terms of balance sheets and the money view. How does the gold standard compare to the potential for a global fiat currency? Reading 7: A Reconsideration of the Twentienth Century by Robert Mundell Study QuestionsMundell tells a story of the evolution (devolution?) of the international monetary system over the course of the 20th century. He wants to address exchange rate stability through domestic price level stability, ultimately paving the way for a new international currency. To what extent are his story and vision compatible with the money view? Money and Banking Summer 2021 Reddit Master Thread

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Online

15 Jul 2021

Webinar

Week 9 — Lectures 15 & 16, Reading 8

We're discussing the following for week 9: Lecture 15: Banks and Global Liquidity Lecture NotesApply the Treynor model to foreign exchange in a gold-standard world, with the gold points setting the outside spread. Gold parity must hold within that narrow band or you're off the gold standard. There are important differences between internal and external drains. Lecture 16: Foreign Exchange Lecture NotesApply the Treynor model to the foreign exchange dealer market in the context of a flexible-exchange-rate system. Mehrling walks us through an example of foreign exchange market-making that tells a story of why uncovered interest parity and the expectations hypothesis fail. Reading 8: The Dollar and World Liquidity: A Minority View by Charles Kindleberger Kindleberger explains that in the 1960s, the US was acting as a bank to the world payment system by supplying its own dollar liabilities as liquid money and making longer-term international investments. That's not necessarily a bad thing—someone has to do it. Money and Banking Summer 2021 Reddit Master Thread

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Online

22 Jul 2021

Webinar

Week 10 — Lectures 17 & 18, Reading 9

We're discussing the following for week 10: Lecture 17: Direct and Indirect Finance Lecture NotesCapital markets (direct finance) were once thought to be largely separate from money markets (indirect finance). But money-market funding helps give "shiftability" to capital assets, and liquidity to capital markets. In the 1930's the Fed refused to backstop the shadow banking of the day. The system was allowed to collapse. Lecture 18: Forwards and Futures Lecture NotesSomewhat of a sequel to Lecture 8 about lining up the timing of cashflows. Forwards and Futures help us think about derivatives. Futures are marked to market. If a price isn't what you think it should be, someone is paying for something—often liquidity. Cash and carry arbitrage. Reading 9: Chapter 5 of Money in a Theory of Finance by Gurley and Shaw (1960) Study QuestionsA model that emphasizes funding over payments. "Primary debt" is any debt that directly funds a real investment—direct investment. "Indirect debt" merely serves as pass-through financing for primary debt—indirect investment. For Gurley and Shaw, "inside money" is any money that directly or indirectly finances private-sector primary debt. See Lecture 17. Money and Banking Summer 2021 Reddit Master Thread

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Working groups
  • Financial Stability
Project Organizers
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Alex Howlett

For questions, the Project Organizers.

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Week 10 — Lectures 17 & 18, Reading 9

July 22 2021, 18:00

We're discussing the following for week 10:

Lecture 17: Direct and Indirect Finance

Lecture Notes
Capital markets (direct finance) were once thought to be largely separate from money markets (indirect finance). But money-market funding helps give "shiftability" to capital assets, and liquidity to capital markets. In the 1930's the Fed refused to backstop the shadow banking of the day. The system was allowed to collapse.

Lecture 18: Forwards and Futures

Lecture Notes
Somewhat of a sequel to Lecture 8 about lining up the timing of cashflows. Forwards and Futures help us think about derivatives. Futures are marked to market. If a price isn't what you think it should be, someone is paying for something—often liquidity. Cash and carry arbitrage.

Reading 9: Chapter 5 of Money in a Theory of Finance by Gurley and Shaw (1960)

Study Questions
A model that emphasizes funding over payments. "Primary debt" is any debt that directly funds a real investment—direct investment. "Indirect debt" merely serves as pass-through financing for primary debt—indirect investment. For Gurley and Shaw, "inside money" is any money that directly or indirectly finances private-sector primary debt. See Lecture 17.

Money and Banking Summer 2021 Reddit Master Thread

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Time & Date

Start: July 22 2021, 18:00*

Duration: 60 minutes

*Time is displayed in your local time zone (Africa/Abidjan).

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Topic: Week 10 — Lectures 17 & 18, Reading 9

Time: July 22 2021, 18:00 (Timezone: Africa/Abidjan)

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