Economics of Money and Banking MOOC (2022)
Perry Mehrling's Money and Banking MOOC
March 2022 - December 2022
We're working through Perry Mehrling's Money and Banking MOOC. Deepen your understanding of the "money view"!
Discuss the lectures and readings on the r/moneyview subreddit.
A group of us is working through Perry Mehrling's iconic Money and Banking MOOC at a decelerated pace of one lecture or reading per week. We start on April 1st, 2022, and run through the middle of November. Many of us have taken the course before, and 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, though becoming more widely accepted, represents a departure from how money and banking had previously been taught.
Each lecture is about an hour and 15 minutes long, and broken into several video segments. We meet for an hour via Zoom every Wednesday (previously Friday) at 2pm Eastern Time (US) to discuss the lectures and readings. Further questions and discussion happen via the r/moneyview subreddit and the INET ED discussion board. Each lecture and reading has its own thread.
The lectures and readings are also accessible for free on Coursera, with some simple tests and quizzes mixed in.
As an enhancement to the material, we are incorporating Borja Clavero's color-coded payment notation into 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)
We are also using Daniel Neilson's Quadruple Entry Accounting terminology to classify different types of transaction structures.
* Note: We've renamed Neilson's Secured Loan and Repayment to IOU Swap and IOU Unswap, respectively.
Below is a sample color-coded balance sheet from Lecture 6.
These lectures were recorded back in 2012. The landscape of money and banking is always changing, so we may also refer to more recent material from Mehrling (and others) when appropriate.
- Perry Mehrling Papers
- Perry Mehrling Videos
- Perry Mehrling Blog
- Soon Parted Substack by Daniel Neilson
- Zoltan Pozsar's Global Money Notes, which ran from May 2015 to June 2020.
- Elham's Money View Blog by Elham Saeidinezad
30 Sep 2022
Discussion — Lecture 16: Foreign Exchange
This session covers Lecture 16: Foreign Exchange The lecture gives us a framework for reasoning about the foreign exchange dealer market in the context of a flexible-exchange-rate system. In typical money-view fashion, we look at foreign exchange market making through a lens of trading money for money, while pushing the trade of commodities and non-financial services into the background. This framework allows to tell a story about why uncovered interest parity (UIP) and the expectations hypothesis (EH) of the term structure both fail. Lecture 16 is the most complicated lecture of the whole course. Furthermore, Mehrling's thinking on foreign exchange was still a work in progress when the lecture was filmed ten years ago. After working on it a bit more, he turned it into a paper in 2013. Essential hybridity: a money view of FX The paper uses the opposite exchange rate quoting convention from the lecture, and uses the term "forward interest parity" in place of "covered interest parity." Lecture Notes Money and Banking 2022 Reddit Master ThreadLearn more
7 Oct 2022
Discussion — Lecture 17: Direct and Indirect Finance
This session covers Lecture 17: Direct and Indirect Finance Until now, we haven't been talking as much about banks as intermediaries. The lecture will help us think about next week's Gurley and Shaw reading, which emphasizes indirect finance and intermediation. Mehrling tells a story about how the money market and capital market became intertwined, why long-term borrowing went from being non-intermediated to intermediated, and how risk can still pass through intermediated borrowing. We start with the more intuitive description of simple, traditional "Jimmy Stewart" banking. Mehrling then describes the evolution and emergence of shadow banking as an iterative process of intermediation and disintermediation. Money-market funding helps give "shiftability" to capital assets, and liquidity to capital markets. We can think of the financial crisis of 1929 and 1930 as a collapse of their version of a shadow banking system. The Fed refused to backstop the shadow banking activity, and allowed the system to collapse. Lecture Notes Money and Banking 2022 Reddit Master ThreadLearn more
14 Oct 2022
Discussion — Reading 9: Gurley & Shaw
This session covers Reading 9: the first part of Chapter 5 of Money in a Theory of Finance by Gurley and Shaw (1960) Reinforcing some of what we learned in Lecture 17, Gurley and Shaw present 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. Perry Mehrling says: "You can focus on pp. 132-173, although I include more in case you want to explore deeper. This book was significant for bringing money back into economics in 1960, and emphasizing the importance of financial intermediation for economic growth. The language "inside" and "outside" money comes from G&S, as also "gross money view" versus "net money view". Their opponents are the monetary Walrasians, mainly Don Patinkin. But they don't really take a payments or market-making view, do they? Instead they emphasize the role of banks as financial intermediaries between savers and investors." Study Questions Money and Banking 2022 Reddit Master ThreadLearn more
21 Oct 2022
Discussion — Lecture 18: Forwards and Futures
This session covers Lecture 18: Forwards and Futures The lecture is somewhat of a sequel to Lecture 8, which talked about lining up the timings of cashflows and cash commitments. People can use forwards and futures to match up the time pattern of their cash inflows with their cash commitments. Our exploration of forward contracts (and FRAs) and futures also serves as an entry point for making sense of other types of derivatives. The finance perspective says that "the future determines the present." Interest rates right now are determined partly by people's expectations of the future and commitments for the future. We investigate the puzzle of why cash and carry arbitrage can be profitable. If a price isn't what you think it should be, someone is probably paying for something. And in this course, that something is usually some form of liquidity. Lecture Notes Money and Banking 2022 Reddit Master ThreadLearn more
28 Oct 2022
Discussion — Lecture 19: Interest Rate Swaps
This session covers 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 This week and next week's lectures describe two important building blocks for shadow banking: interest-rate swaps (this week) and credit default swaps (next week). The lecture works largely out of Stigum Chapter 19. Stigum defines interest-rate swaps as follows: An interest-rate swap is a contract between two parties to pay and receive, with a set frequency, interest payments determined by applying the differential between two interest rates—for example, 5-year fixed and 6-month LIBOR—to an agreed-upon notional principal. (p. 869) Mehrling uses the balance-sheet framework we already know to explain the mechanics of an interest-rate swap. We build incrementally on concepts we've covered so far, including repo and forward contracts. 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. IRS is a swap that's equivalent to borrowing long and lending short. Lecture Notes Money and Banking 2022 Reddit Master ThreadLearn more
4 Nov 2022
Discussion — Reading 10: 1952 FOMC Report
This session covers Reading 10: Excerpts from a 1952 report to the FOMC (parts one, two, and three) The document is the previously secret Fed report that Perry Mehrling mentions in Lecture 19. The 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). The preface explains why this is an important policy objective. Much of the report is a response to feedback the committee received from market participants. They went out and interviewed the money-market dealers to ask about how they could be doing their job better. Lots of stuff in here about different kinds of complaints from various parties, and recommendations for how to address those complaints. Perry Mehrling says: "The report itself is on 2005-2034 plus appendices (especially Appendix D 2053-55). The response of the NY Fed is on 2055-2079. We see here a kind of re-negotiation of the relationship between the Fed and the private security dealers, as part of the transition away from war finance conditions toward an imagined post-war normalcy. As always in American monetary affairs, this is a negotiation between the money interest motivated by profit and the public interest motivated by stability. In 1952, the concern was about exit from the abnormal financial conditions of wartime. At present, our concern is about exit from the abnormal financial conditions of the global financial crisis. One way to connect the document to the money view that we are studying is to think of the Fed transitioning from making the inside spread (pegging price), to making the outside spread (preventing disorderly conditions), and from holding the price of money constant to adapting the price of money to current economic conditions." Study Questions Money and Banking 2022 Reddit Master ThreadLearn more
11 Nov 2022
Discussion — Lecture 20: Credit Default Swaps
This session covers 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)? Credit default swaps (CDS) were famously implicated in the financial collapse of 2008. From our balance-sheet money-view perspective, CDS are only slightly more complicated than interest rate swaps. Just as IRS is a swap that's equivalent to borrowing long and lending short. CDS is a swap that's equivalent to borrowing "risky" and lending "safe." You pay more interest on your notional "borrowing" than you get on your notional "lending." If the underlying risky bond defaults, you get a free Treasury. If it doesn't, then you just paid the interest-rate spread for a period of time. Some instruments—for example, mortgage-backed-securities—that aren't normally traded on the market can still have prices imputed from the market price of CDS. We use balance sheets to dissect three interesting cases where CDS played a role in the 2008 financial crisis. Lecture Notes Money and Banking 2022 Reddit Master ThreadLearn more
18 Nov 2022
Discussion — Lecture 21: Shadow Banking, Central Banking, Global Finance
This session covers Lecture 21 Shadow Banking, Central Banking, and Global Finance Everything in the shadow-banking system is a market price. The lecture emphasizes the central role of derivative dealers and their swap books in the modern market-based credit system. We examine more of the details of how the shadow banking system collapsed onto the traditional banking system. To prevent this occurrence in the future, it is the derivative dealers who need a backstop. This lecture is also the foundation for next week's reading, which will explore some of the same questions more deeply. Lecture Slides Money and Banking 2022 Reddit Master ThreadLearn more
25 Nov 2022
Discussion — Reading 11: Shadow Banking
This session covers 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. The paper covers much of the same material as Lecture 21. A big thing that it adds to the lecture is the comparison to Bagehot's 19th-century gold-standard world, which we learned about in Lecture 9, Lecture 15, and the Walter Bagehot Lombard Street reading. From the course website: "The authors of this reading came together around a mutual sense that much of the existing literature and conversation was missing essential features of the emerging market-based credit system, simply because it was too bound to an old-fashioned Jimmy Stewart conception of banking. To most people, shadow banking seemed like a consequence of regulatory arbitrage, if not outright fraud, which is to say something that should never have been allowed and should now be suppressed. The Shadow Banking Colloquium started from a very different place, imagining a world in which all banking was shadow banking, and then asking how such a world would work, and how it might best be regulated. Our team included voices from banking, central banking, and academia, and we set ourselves the task of finding a simple framework that made sense to all of us, coming from our different worlds. If we could find a common language, maybe that language would also serve as a common language for others, and so it has proven to be the case." Study Questions Money and Banking 2022 Reddit Master ThreadLearn more
2 Dec 2022
Discussion — Lecture 22: Touching the Elephant: Three Views
This session covers Lecture 22: Touching the Elephant: Three Views The lecture ties the money view into the "economics view" and "finance view" of money and banking. The 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. In addition to connecting up to some of the economics and finance models that we're used to, Mehrling describes an intellectual progression building from Fischer Black's view of finance. The key insight is that market liquidity is not free. It comes from the dealer system. And the dealer system depends on funding liquidity, which ultimately comes from the central bank. Lecture Notes Money and Banking 2022 Reddit Master ThreadLearn more
1 Apr 2022
Discussion — Lecture 1: The Four Prices of Money
Welcome to Money and Banking! This session covers Lecture 1: The Four Prices of Money. This lecture provides motivation, context, and themes for the Money and Banking MOOC. Lecture Notes Many of us have taken the course before. In addition to discussing the lecture, we will also introduce ourselves and set our intentions for working through the material. Chapters 1-3 of Stigum's Money Market provide an overview of some of the course subject matter from a market practitioners' perspective. For a concise overview/refresher of Perry Mehrling's Money View, check out Elham Saeidinezhad's Promises All the Way Down: A Primer on the Money View. The lectures for this course were filmed in the fall of 2012, but the world didn't stop then. For more Money View resources, including more recent/ongoing material, see: - Archive of the original The Money View blog, which goes from November 2010 to October 2012.- Perry Mehrling's more recent blog, which has posts from April 2015 to June 2020.- Dan Neilson's Soon Parted Substack, which just started a few months ago and updates regularly.- Zoltan Poszar's Global Money Notes, which runs from May 2015 to June 2020. We will also go over the Borja Clavero color-coded payment notation, which can help us make intuitive sense of the balance sheet. 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) Money and Banking 2022 INET ED Master ThreadLecture 1 Discussion ThreadLearn more
8 Apr 2022
Discussion — Lecture 2: The Natural Hierarchy of Money
This session covers Lecture 2: The Natural Hierarchy of Money. This lecture provides a big-picture overview of the whole course. If you've done the MOOC before, it will feel familiar. Lecture Notes Money and Banking 2022 INET ED Master Thread Lecture 2 Discussion ThreadLearn more
15 Apr 2022
Discussion — Reading 1: Allyn Young
This session covers Reading 1: Four encyclopedia chapters by Allyn Young. Young, writing in the 1920s shares his perspective on the nature of money and credit, the importance of a monetary standard, and the purpose of banking. He also gives us a history of the United States banking system leading up to the formation of the Fed. Study Questions Money and Banking 2022 INET ED Master ThreadAllyn Young Reading Discussion ThreadLearn more
22 Apr 2022
Discussion — Lecture 3: Money and the State: Domestic
This session covers Lecture 3: Money and the State: Domestic. The lecture gives us some practice using balance sheet notation to describe some of the historical US banking structures from the Allyn Young reading. This includes the National Banking System, which was the precursor to the Fed, as well as mechanism that Treasury Secretary Salmon P. Chase to suck all the gold out of the private banking system and fund the Civil War. Lecture Notes Money and Banking 2022 INET ED Master ThreadLecture 3 Discussion ThreadLearn more
29 Apr 2022
Discussion — Lecture 4: The Money View, Micro and Macro
This session covers Lecture 4: The Money View, Micro and Macro This lecture connects up the money view with Hyman Minsky's cashflow-oriented view of the economy. The payments system is a credit system. The expansion of credit makes ordinary payments possible. But sometimes the expansion of credit has to come from above in the hierarchy. Everybody is constrained by a reserve constraint (survival constraint). If your cash inflows are insufficient to cover your cash commitments at any given moment, then you're dead. "Liquidity kills you quick." We disaggregate assets into time-patterns of future cash inflows, and liabilities into time patterns of future cash outflows. We also cover flow-of-funds accounting with sources and uses of funds. Every use of funds has a corresponding source on its own balance sheet (micro) and on someone else's (macro). Lecture Notes Lecture 4 Discussion ThreadLearn more
6 May 2022
Discussion — Reading 2: Hyman Minsky
This session covers Reading 2: The vision of Hyman P. Minsky by Perry Mehrling Minsky put the problem of liquidity front and center. This reading is very much tied to the content of Lecture 4, which emphasizes the survival constraint: At any given point in time, every economic agent must ensure it has sufficient cash inflow to meet its cash commitments. If you can't meet your cash commitments, then you're done. "Liquidity kills you quick." Study Questions The article was published in 1999. Mehrling also has a blog post from 2015, which serves as a reconsidered—and shorter—biography of Minsky that places greater emphasis on Joseph Schumpeter's influence on Minsky's thinking. Minsky’s Financial Instability Hypothesis and Modern Economics Hyman Minsky Reading Discussion ThreadLearn more
13 May 2022
Discussion — Lecture 5: The Central Bank as a Clearinghouse
This session covers Lecture 5: The Central Bank as a Clearinghouse The lecture describes the interconnectedness of bank balance sheets that allow the payment system to operate smoothly. The central bank helps knit the payment system together to make it approximate the behavior of one big bank. We cover correspondent banking and central bank cooperation. Lecture Notes Money and Banking 2022 INET ED Master ThreadLearn more
20 May 2022
Discussion — Lecture 6: Federal Funds, Final Settlement
This session covers Lecture 6: Federal Funds, Final Settlement This lecture describes a stylized version of the US payment system, and how the Fed Funds market (interbank lending) allocated reserves among the banks before 2008 to allow them to meet their settlement constraints. It works just like Lecture 5 when the clearinghouse members borrowed from each other to be able to settle at the end of the day. Since the 2008 crisis, there has been very little in the way of daylight overdrafts with the Fed, let alone overnight borrowing to roll over those positions. The Fed Funds market is now largely a regulatory arbitrage market. Today, the repo (repurchase agreements) market, serves largely the same purpose as Fed Funds used to, but for financial institutions that don't have direct access to the Fed's balance sheet. Perry Mehrling reminds us that "the conceptual framework remains valid." We get lots of balance-sheet practice for understanding how a credit-based payment system works. Through the lens of the Fed Funds market, we learn, among other things, about the meaning of "Real-Time Gross Settlement," the distinction between dealers and brokers, and the distinction between payments and funding. These topics will come up again and again throughout the course. Lecture Notes Lecture 6 Discussion ThreadLearn more
27 May 2022
Discussion — Reading 3: Charles Dunbar
This session covers Reading 3: The Check System, a chapter from Chapters on the Theory and History of Banking by Charles Dunbar The reading is a description of the checking system in the US in the late 19th century. It reinforces what we covered in Lecture 5 by describing the "decentralized" check-based payment system of the United States in the late 19th century. Just like the lecture, Dunbar starts with the "one big bank" example and builds toward multiple banks coordinated through a clearinghouse. *[A] payment for goods or of a debt is effected by a simple transfer of a right to demand money from the bank; and so too if the recipient of the check gives it in payment to some third person, and he to a fourth, and so on. To this extent the check is plainly made a substitute for the sum of money for which it calls.* In the 1890's we transferred bank deposits using checks. Today, we transfer bank deposits using debit cards or PayPal. But it's the same basic principle. Study Questions Money and Banking 2022 INET ED Master ThreadLearn more
3 Jun 2022
Discussion — Lecture 7: Repos, Postponing Settlement
This session covers Lecture 7: Repos, Postponing Settlement Repurchase agreements (repos or RP) are a form of market-based collateralized lending that can be used for interbank lending much like the Fed Funds market. Borrowers give securities as collateral to borrow money. A key difference between Fed Funds and repo markets is that anyone who can put up the collateral can borrow in the repo markets. This is unlike the Fed Funds market, where only institutions with accounts at the Fed (e.g. American commercial banks) are allowed to participate. Something to keep in mind with the repo market is that a flow of money always has a corresponding flow of collateral. If the securities used as collateral lose their value, then that impedes the flow of money through the market. Firms become less able to borrow and less able to roll over their funding independent of anything to do with their own creditworthiness. The Fed Funds market doesn't have this problem. Lecture Notes Lecture 7 Discussion ThreadLearn more
10 Jun 2022
Discussion — Lecture 8: Eurodollars, Parallel Settlement
This session covers Lecture 8: Eurodollars, Parallel Settlement In introducing the Eurodollar market, this lecture helps us map the concept of lining up cash inflows and cash commitments (from Lecture 4) onto balance sheets. Notice that in the lecture, Mehrling tends not to record the actual cashflows on the balance sheets. Instead, he leaves them implied. Eurodollar 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 the expectations hypothesis of the term structure (EH) and uncovered interest parity (UIP) presents a mystery. Even if it looks like a complicated little derivative, it's a swap of IOUs. Another key point from the lecture is the distinction between funding and payments. The Eurodollar market is a global funding market in the sense borrowing in the Eurodollar market is often used to fund long-lasting credit positions. This is in contrast with Fed Funds, which mostly just funded left-over payment positions that didn't collapse back down at the end of the day. The Eurodollar market is partly about economizing domestic balance-sheet space. Doing more of your business in Eurodollars allows you to get around reserve requirements and other capital constraints. But if there's lots of extra balance-sheet space, then maybe you don't need to economize as much. As with the Fed Funds market, the Eurodollar market has seen a big shift in recent years, again mostly being supplanted by repo. The LIBOR benchmark interest rates have been abandoned in favor of the SOFR (secured overnight funding rate). Lecture Notes Lecture 8 Discussion ThreadLearn more
17 Jun 2022
Discussion — Reading 4: Walter Bagehot
This session covers Reading 4: Chapter VII of Lombard Street by Walter Bagehot This chapter describes the workings of the Bank of England's reserve system in the second half of the 19th century. 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 monetary reserve through the second half of the 19th century. The reading gives some context for next week's lecture: The World that Bagehot Knew, and describes the central banking approach that would later become known as the Bagehot rule or the Bagehot principle: In times of crisis, lend freely at a high rate against good security (collateral). Study Questions Bagehot Reading Discussion ThreadLearn more
6 Jul 2022
Discussion — Lecture 9: The World that Bagehot Knew
This session covers Lecture 9: The World That Bagehot Knew From the nineteenth-century international gold standard, we can draw insights that apply to the globally financialized world of today. We learn about the origins of monetary policy in the discount mechanism and the manipulation of the discount rate. This lecture connects up with the Walter Bagehot reading from last week, as well as the Allyn Young reading we did at the beginning. We transition from thinking of banking as a payments system to thinking of banking as market-making. Previously, we focused on the par price of money. Starting now, and for the next several weeks, we will more deeply explore interest rates—especially how dealers determine interest rates. Lecture Notes Lecture 9 Discussion ThreadLearn more
13 Jul 2022
Discussion — Lecture 10: Dealers and Liquid Security Markets
This session covers Lecture 10: Dealers and Liquid Security Markets This lecture is all about dealers. It emphasizes the concept of "market liquidity" as distinct from "funding liquidity" and introduces the Treynor model of the economics of the dealer function. We're starting by looking at security dealers, but we'll be using this model for the rest of the course and expanding it to other types of dealers, including money dealers (banks). Key take-aways are that dealers use inventories absorb order flow mismatches and translate funding liquidity into market liquidity (shiftability). We also explore the idea of matched-book dealers and the importance of gross exposure versus net exposure. Lecture Notes Lecture 10 Discussion ThreadLearn more
20 Jul 2022
Discussion — Reading 5: John Hicks
This session covers Reading 5: Three chapters from A Market Theory of Money by John Hicks (1989) In these three chapters, Hicks starts with the idea that the primary function of money is to serve as a "standard of value" for the market. From there, he argues that the institution of banking as market making naturally emerges from the need for a smoothly operating payment system. 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. Study Questions See also Perry Mehrling's 2017 intellectual biography of John Hicks. The Monetary Education of John Hicks Hicks Reading Discussion ThreadLearn more
27 Jul 2022
Discussion — Lecture 11: Banks and the Market for Liquidity
This session covers Lecture 11: Banks and the Market for Liquidity This lecture generalizes the Treynor model from security dealers to money dealers and explores the question of why it's profitable for banks to run the payment system at par when prices can't adjust and there's no bid/ask spread. We also talk about how the Fed manages interest rates (floor vs. corridor system) and the evolution of shadow banking. Lecture Notes Lecture 11 Discussion ThreadLearn more
3 Aug 2022
Discussion — Lecture 12: Lender/Dealer of Last Resort
This session covers Lecture 12: Lender/Dealer of Last Resort We can better understand how the central bank intervenes in the markets by first understanding the markets themselves. The lecture applies what we've learned so far to understanding how the 2008 crisis unfolded and how it was eventually contained. The shadow banking system collapsed onto the regular banking system, which was ultimately backstopped by the Fed. The Fed went from being a lender of last resort (funding liquidity) to a dealer of last resort (market liquidity). Lecture Notes Lecture 12 Discussion ThreadLearn more
10 Aug 2022
Discussion — Reading 6: Jack Treynor
This session covers Reading 6: The Economics of the Dealer Function by Jack Treynor We already understand the Treynor model fairly well from the last few lectures. This article provides a more formal description of the securities market version of the model introduced in Lecture 10. In Lecture 11, Perry generalized the Treynor model for use in the term funding market and the overnight borrowing market, but Treynor doesn't go that far. Perry Mehrling says: "If you want to think about banks as a special kind of dealer, one place to start is with Treynor's model of the economics of the dealer function. Treynor is concerned with security dealers, not banks, but the essential ideas that we need are all there. Dealers make money by supplying market liquidity, which they do by offering trading options. The Treynor diagram that I use in lecture is adapted from this article." The reading formalizes something we've already built an intuition for. It might be useful to read the study questions before reading the article. Study Questions And if you haven't seen Perry's Treynor Model tutorial video, it might be useful to watch that first too. Treynor Model Tutorial Treynor Reading Discussion ThreadLearn more
17 Aug 2022
Discussion — Midterm Review
This session is a Review of Part 1 NOTE: The 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 linked 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 interest parity, and more. We will review anything we want to discuss from the first half of the course. The first twelve lectures can be roughly divided into three chunks, with the first chunk introducing the money view and the balance sheet technique, the middle chunk discussing the payment system, and the most recent chunk covering dealers and market-making. The second part of the course builds on all of this. Midterm Review Discussion ThreadLearn more
24 Aug 2022
Discussion — Lecture 13: Chartallism, Metallism, and Key Currencies
This session covers Lecture 13: Chartallism, Metallism, and Key Currencies In the first half of the course, we focused on two prices of money: par and interest rates. With the next four lectures, we explore a third price of money: foreign exchange. This allows us to revisit fundamental questions about the nature of money. How can we understand the nature of money in the context of a global economy with many different currencies interacting with each other? Note: Mehrling uses the term "forward interest parity" in this lecture to describe what he calls "covered interest parity" elsewhere, including lecture 8, *and in the notes for this lecture. He usually uses "covered interest parity" to describe the relationship between interest rates and exchange rates, and "forward interest parity" in the context of forward rate agreements (FRAs) and the term structure of interest rates.* This week's lecture examines the nature of the base money that sits at the top of a domestic money-credit hierarchy. Chartalism holds that the value of base money comes from the state and its laws and institutions. Metallism holds that the value of base money comes from the intrinsic value of the underlying metal. Which one is right? Both? Neither? Lecture Notes Lecture 13 Discussion ThreadLearn more
31 Aug 2022
Discussion — Reading 7: Robert Mundell
This session covers Reading 7: A Reconsideration of the Twentieth Century by Robert Mundell The reading forms the basis for Lecture 14 (next week). In it, Mundell 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: the euro. Perry Mehrling says: "This piece is meant mainly to set the scene for our discussion of foreign exchange, in the same way that the Allyn Young piece set the scene for Part One. Note the importance that Mundell places on the price of gold—is he a metallist? He also uses the language of discipline and elasticity—is his view compatible with the money view? Note p. 333 his emphasis on US deficit as the source of world reserves, and compare with the Kindleberger reading below." Study Questions Mundell Reading Discussion ThreadLearn more
7 Sep 2022
Discussion — Lecture 14: Money and the State: International
This session covers Lecture 14: Money and the State: International The lecture builds on the Robert Mundell reading from last week in an attempt to extend the money view to international monetary systems. We add balance sheets to Mundell's story of the 20th century, and continue the story into the early 21st century. We can ask how a gold standard compares to a global fiat currency. Perry says: This lecture is meant to parallel #3, but not so successful in my mind, since I was still working out money view of fx in 2012. He recommends taking a look at the following paper of his from 2015: Elasticity and Discipline in the Global Swap Network Lecture Notes Lecture 14 Discussion ThreadLearn more
14 Sep 2022
Discussion — Lecture 15: Banks and Global Liquidity
This session covers Lecture 15: Banks and Global Liquidity The lecture uses the context of a 19th-century gold-standard world to introduce the Treynor model to foreign exchange markets. We flesh out the international dimension to what we covered in Lecture 9. Gold parity must hold within that narrow band or you're off the gold standard. FX dealers operate within the outside spread set by the gold points. We discuss the important differences between internal and external drains, and the discipline that central banks face. Lecture Notes Lecture 15 Discussion ThreadLearn more
21 Sep 2022
Discussion — Reading 8: Charles Kindleberger
This session covers Reading 8: The Dollar and World Liquidity: A Minority View, a 1966 article by Charles Kindleberger, Walter Despres, and Walter S. Salant, which originally appeared in The Economist. Perry Mehrling says: "This reading contrasts with Mundell, and much of the contemporary economic debate, by taking a banking view of international money and balance of payments. According to Kindleberger, the US should be understood as bank of the world, borrowing short-term and lending long-term, thus providing both liquid assets and long term capital funding. The US is different from other countries insofar as the dollar is the world reserve currency and dollar money markets are the world funding markets. Thus the Eurodollar rate is actually the world rate of interest. Kindleberger worries about misguided attempts to 'correct' deficits since they may wind up inhibiting the free flow of capital on which world growth depends." By viewing the United States as a bank to the rest of the world, Kindleberger tries to allay concerns about a U.S. balance-of-payments deficit. He points out that the U.S. was supplying the world reserve currency primarily by lending rather than spending dollars into the global economy. He calls into question the appropriate definition of a "deficit" in the first place. Kindleberger's perspective is an alternative to that of Robert Triffin who believed that a U.S. trade (current account) deficit was needed to supply the world with dollars, and that such a deficit would eventually destabilize the dollar by causing a gold drain. Mehrling's latest book tells the story of the rise of global dollar system through the lens of an intellectual biography of Charles Kindleberger. Chapter 6 gives some context for this paper. Kindleberger Reading Discussion ThreadLearn more
- Financial Stability
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Discussion — Lecture 6: Federal Funds, Final Settlement
May 20 2022, 18:00
This session covers Lecture 6: Federal Funds, Final Settlement
This lecture describes a stylized version of the US payment system, and how the Fed Funds market (interbank lending) allocated reserves among the banks before 2008 to allow them to meet their settlement constraints. It works just like Lecture 5 when the clearinghouse members borrowed from each other to be able to settle at the end of the day.
Since the 2008 crisis, there has been very little in the way of daylight overdrafts with the Fed, let alone overnight borrowing to roll over those positions. The Fed Funds market is now largely a regulatory arbitrage market. Today, the repo (repurchase agreements) market, serves largely the same purpose as Fed Funds used to, but for financial institutions that don't have direct access to the Fed's balance sheet. Perry Mehrling reminds us that "the conceptual framework remains valid."
We get lots of balance-sheet practice for understanding how a credit-based payment system works. Through the lens of the Fed Funds market, we learn, among other things, about the meaning of "Real-Time Gross Settlement," the distinction between dealers and brokers, and the distinction between payments and funding. These topics will come up again and again throughout the course.
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Start: May 20 2022, 18:00*
Duration: 60 minutes
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Topic: Discussion — Lecture 6: Federal Funds, Final Settlement
Time: May 20 2022, 18:00 (Timezone: Africa/Abidjan)
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