{"id":168,"date":"2018-12-17T15:40:09","date_gmt":"2018-12-17T20:40:09","guid":{"rendered":"https:\/\/sites.bu.edu\/perry\/?p=168"},"modified":"2019-01-18T15:34:44","modified_gmt":"2019-01-18T20:34:44","slug":"where-is-politics-in-the-money-view-2","status":"publish","type":"post","link":"https:\/\/sites.bu.edu\/perry\/2018\/12\/17\/where-is-politics-in-the-money-view-2\/","title":{"rendered":"Where is politics in the money view?"},"content":{"rendered":"

The following was inspired by my attendance at a recent conference, Money as a Democratic Medium<\/a>, where I gave a short talk.<\/p>\n

The “Money View”, as regular readers of this blog will know, is my attempt to systematize a way of thinking that has a long history among practitioners, especially central bankers, but that has always remained a minority view among academics, and also to update that way of thinking in order to engage the central facts of our age, namely financial globalization and global financialization.\u00a0 Mostly I have been concerned to bring attention to the analytical importance of the settlement constraint, which Minsky called the survival constraint, and also to the centrality of the dealer function in determining asset prices of all kinds.\u00a0 This project has taken me deep into the institutional details of the present monetary and financial system, so deep that sometimes it may be hard for readers to keep in mind the big picture.\u00a0 That big picture is the subject of the present post.<\/p>\n

Here in brief are three big-picture themes that I saw running through the entire conference, my vision admittedly shaped by the money view lens that I brought with me to the conversation.\u00a0 I state the themes as succinctly as I can, and then elaborate on each one.<\/p>\n

    \n
  1. \u00a0The monetary-financial system is\u00a0inherently hybrid<\/strong>, both public and private, each dimension with its own source of power.<\/li>\n
  2. \u00a0The points at which these two dimensions meet are under persistent contestation<\/strong>, which is to say inherently political, and inherently in need of management.<\/li>\n
  3. \u00a0A central issue of contestation is elasticity versus discipline<\/strong>, elasticity for me and discipline for you, alchemy of banking and money funding for me, austerity and borrowing\/payment for you.<\/li>\n<\/ol>\n

    I take these to be empirical features of the system, today but also throughout much of the past, though there is considerable variation over time and place, variation in the balance of public and private, and variation in the forms that contestation takes.\u00a0 Here is where we can locate the normative or aspirational aspect of various monetary reform projects.\u00a0 How can we get elasticity for the projects we favor, and discipline for the projects we oppose?\u00a0 \u00a0Sometimes that will involve making common cause with a public authority, sometimes with a private agents, many times some kind of hybrid.<\/p>\n

    Elaboration<\/em><\/p>\n

    In my reading of history (Boyer-Xambeu, Braudel, Tilly), money has arisen from two different sources, one public and one private.\u00a0 The systems erected from these origins–in both cases more or less deliberate constructions by collectivities, albeit different collectivities–developed for a long time separately, but at a certain stage merged into the hybrid that we see today.\u00a0 Instead of king’s money and merchant’s money, with an exchange rate between them that fluctuates over time, we have state money and bank money that trade at par.\u00a0 \u00a0From a money view perspective, the important thing is that both have their origin in a dependable positive cash flow, so that IOUs issued tend to return to the issuer as means of payment; that’s how credit becomes money.<\/p>\n

    Both issue money, but it is important to keep in mind the two underlying origins, and their separate logics–Tilly emphasizes coercion (taxes) by the state, and exploitation (profits) by the city, though perhaps democratic legitimacy for both is more relevant today?–because the boundary between the two is subject to persistent contestation, and the outcome of that contestation varies widely over time and place.\u00a0 What exactly is that contestation about?\u00a0 Two things.<\/p>\n

    First, the alchemy of banking<\/strong>.\u00a0 The elemental banking operation is a swap of IOUs, a non-tradeable IOU (loan) for a tradeable one (bank deposit).\u00a0 I say “alchemy” in order to draw attention to the way that the recipient of the loan is thereby given access to social resources without any prior earning or saving.\u00a0 We are talking here about new purchasing power that arises from nothing, or more precisely from a mere balance sheet operation.\u00a0 Suffice it to say that everyone would like access, even monopoly access, to this elemental magic.\u00a0 And in fact we do observe some extreme cases of monopoly in history.\u00a0 War finance quite typically involves a state monopoly, which can sometimes flip over to rather extreme private monopoly in peace time.\u00a0 But most of the time, and in most places, there is some intermediate balance between public and private, and balance also between various competing public uses, and between various competing private uses.<\/p>\n

    Second, money funding.\u00a0 The alchemy of banking is a source of elasticity, but the problem of ultimate funding is a source of discipline<\/strong>.\u00a0 The question is whether the new purchasing power stays in circulation, held willingly by wealth holders as part of their portfolio of assets of various kinds, or whether it returns to the issuer as payment for one of the issuer’s own financial assets.\u00a0 Concretely, think about mortgage finance.\u00a0 [What follows is a compressed version of a longer argument<\/a>.]\u00a0 One way to fund a new mortgage loan is to securitize it, and use the security as collateral for issuing a money market instrument purchased by a money market mutual fund as the asset counterpart of its short-term par “deposit” liabilities.\u00a0 That’s money funding–the money comes into existence at the moment of the loan, and then stays in existence for the duration of the loan.\u00a0 But another way to fund a new mortgage loan is to securitize it, and sell the security to a pension fund which holds it as the counterpart of its long-term pension liabilities.\u00a0 That’s credit funding–the new money is returned to issuer, and the expected yield on the new credit has to satisfy the wealth holder.\u00a0 These are the two limiting cases, and in practice the typical case is mixed, part money and part credit.\u00a0 For present purposes, the important point is that everyone would like their credit to be funded preferentially by money issue, rather than having to bid for funds against other competing uses.\u00a0 This is the second dimension of contestation.<\/p>\n

    The central point is that everyone wants access to the alchemy of banking not only as a source of immediate payment but also as a source of permanent funding.\u00a0 But only in very special cases will wealthholders be willing to hold money claims sufficient to fund all credit issues.\u00a0 (Economic development sometimes presents such special cases, as emphasized by H.D. MacLeod<\/a> among others.)\u00a0 In general, marginal borrowers will have to bid for funds, and everyone wants that marginal borrower to be someone else.\u00a0 \u00a0Which raises the question, who gets access and who does not, and on what grounds?\u00a0 Here we come face to face with the question of legitimacy, and in particular the question of the legitimacy of central banks (as Tucker) which, as issuers of the ultimate means of payment, are the ultimate arbiters of the contested use of the alchemy of banking.<\/p>\n

    The system is hybrid, and so are modern central banks, which operate as both government banks and bankers’ banks.\u00a0 The present crisis of legitimacy comes from the dealer of last resort operations of the Fed and other central banks during the financial crisis (Mehrling), which essentially involved blessing tottering private money funding operations for securitized mortgages by taking them onto central bank balance sheets.\u00a0 The alchemy of commercial banking is one thing, always subject to the discipline of ultimate funding as we have seen, but the alchemy of central banking is even more powerful magic, especially so in times of crisis when wealthholders seek to shift their portfolios strongly out of credit and into money.\u00a0 Such a private portfolio shift would have been impossible without the willingness of the central bank to expand its own holdings of credit by expanding its own issue of money–acting like a dealer to absorb an imbalance in flow supply and demand for a particular asset.\u00a0 That’s how central banks put a floor on the crisis, so achieving a financial equilibrium without a firesale of credit assets.<\/p>\n

    The problem is that, in so doing, they seem to have created a kind of political disequilibrium by intervening so strongly on one side of a persistent contestation.\u00a0 It is this political disequilibrium that has given rise to calls for sovereign money, which we can understand as appeals to shift the balance of public-private hybridity.\u00a0 I have in mind here specifically MMT<\/a>, Positive Money<\/a>, and Vollgeld<\/a>.\u00a0 In effect, all three appeal to central banks to give greater attention to their role as government banks, and less to their role as bankers’ banks, and seek further to enlist government on their side in doing so; what government would not want its debt to be afforded preferential money funding treatment?\u00a0 The whole point though is to get elasticity for the projects they favor, and discipline for the projects they oppose.<\/p>\n

    From a money view perspective, the most important point to emphasize is that the central bank is an inherently hybrid institution, and that central bank management is fundamentally about managing the hybridity of the larger system atop which it sits.\u00a0 Most recently, the Taylor Rule and inflation targeting emerged as an indirect, and politically acceptable, way of managing that hybridity, but the crisis has disrupted that settlement and left us looking for an alternative.\u00a0 As a wise man once said:\u00a0 “Money will not manage itself, and Lombard Street has a great deal of money to manage.”<\/p>\n

    References<\/em><\/p>\n

    Boyer-Xambeau, Marie-Therese, et al.\u00a0 Private Money and Public Currencies, The 16th Century Challenge<\/em>.\u00a0 M.E. Sharpe, 1994.<\/p>\n

    Braudel, Fernand.\u00a0 The Wheels of Commerce.\u00a0 Vol 2 of Civilization and Capitalism, 15th-18th Century<\/em>.\u00a0 University of California Press, 1992.<\/p>\n

    Mehrling, Perry.\u00a0 The New Lombard Street, How the Fed became the Dealer of Last Resort<\/em>.\u00a0 Princeton, 2010.<\/p>\n

    Tilly, Charles.\u00a0 Coercion, Capital, and European States, AD 990-1992.\u00a0\u00a0<\/em>Basil Blackwell, 1990.<\/p>\n

    Tucker, Paul.\u00a0 Unelected Power.\u00a0 The quest for legitimacy in central banking and the regulatory state<\/em>.\u00a0 Princeton, 2018.<\/p>\n

     <\/p>\n","protected":false},"excerpt":{"rendered":"

    The following was inspired by my attendance at a recent conference, Money as a Democratic Medium, where I gave a short talk. The “Money View”, as regular readers of this blog will know, is my attempt to systematize a way of thinking that has a long history among practitioners, especially central bankers, but that has […]<\/p>\n","protected":false},"author":15789,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[1],"tags":[12,4,39],"_links":{"self":[{"href":"https:\/\/sites.bu.edu\/perry\/wp-json\/wp\/v2\/posts\/168"}],"collection":[{"href":"https:\/\/sites.bu.edu\/perry\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/sites.bu.edu\/perry\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/sites.bu.edu\/perry\/wp-json\/wp\/v2\/users\/15789"}],"replies":[{"embeddable":true,"href":"https:\/\/sites.bu.edu\/perry\/wp-json\/wp\/v2\/comments?post=168"}],"version-history":[{"count":3,"href":"https:\/\/sites.bu.edu\/perry\/wp-json\/wp\/v2\/posts\/168\/revisions"}],"predecessor-version":[{"id":347,"href":"https:\/\/sites.bu.edu\/perry\/wp-json\/wp\/v2\/posts\/168\/revisions\/347"}],"wp:attachment":[{"href":"https:\/\/sites.bu.edu\/perry\/wp-json\/wp\/v2\/media?parent=168"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/sites.bu.edu\/perry\/wp-json\/wp\/v2\/categories?post=168"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/sites.bu.edu\/perry\/wp-json\/wp\/v2\/tags?post=168"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}