The Money View

Insights from Bagehot, for these Trying Times

Here is a talk I gave recently at Wake Forest University.  It is pretty long, but you can page through the video (on the left) by paging through the powerpoint (on the right), and anyway the last twenty minutes are devoted to questions.  I couldn't figure out how to embed it in the blog, but the link will get you there.



I listened and liked your talk very much.

It's no fun commenting on something you mostly agree with. But since your presentation was very much about inviting people to talk in the language you've provided, I'll give it my best shot.

I think I'd take your future ideal financial model even further (slide 9). The C5 in your model provides what you call liquidity puts. I see no reason why these liquidity puts need be provided by a central bank. In the future, financial products called liquidity options - the option to buy or sell some asset (say Apple stock) at a guaranteed point in the bid-ask spread - would be popular financial products traded on organized exchanges. Just as Apple CDS allow investors to split off Apple credit risk and distribute it across the economy, so would Apple liquidity options split away the liquidity risk of transacting in Apple stock in the secondary market and evenly distribute this risk to those willing and capable of holding it.

A private liquidity options market has some advantages over a monopoly last resort system. Liquidity would be competitively priced and no longer supplied in an opaque manner. Central banks would either vacate the market for liquidity services or price their liquidity products off the private liquidity options market. Subsidies to or penalties on institutions anxious for liquidity insurance would be a thing of the past.

If central banks were to cease providing liquidity options, their sole role in the future would be as managers of the clearing and settlement system. The provision of paper money can be easily fulfilled by private banks. I guess central banks would also have to manage the price level.


Thank you, Prof. Mehrling! Very useful as I seek to portray finance, banking, and the meltdown to my students. Best thing I've seen yet.


Interesting idea, but on the other hand, what is to prevent a monopoly in your system? Would the total costs really be less? This is not clear. After all, the Calculus is built on the notion that the integration of the infinitesimally small can add up to something quite significant and meaningful. In other words, I'm not convinced.

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