The Money Problem: Rethinking Financial Regulation - Hardcover

Ricks, Morgan

Hardcover

ISBN 10: 022633032X ISBN 13: 9780226330327

Publisher: University of Chicago Press, 2016

Synopsis

Years have passed since the world experienced one of the worst financial crises in history, and while countless experts have analyzed it, many central questions remain unanswered. Should money creation be considered a ‘public’ or ‘private’ activity—or both? What do we mean by, and want from, financial stability? What role should regulation play? How would we design our monetary institutions if we could start from scratch?
 
In The Money Problem, Morgan Ricks addresses all of these questions and more, offering a practical yet elegant blueprint for a modernized system of money and banking—one that, crucially, can be accomplished through incremental changes to the United States’ current system. He brings a critical, missing dimension to the ongoing debates over financial stability policy, arguing that the issue is primarily one of monetary system design. The Money Problem offers a way to mitigate the risk of catastrophic panic in the future, and it will expand the financial reform conversation in the United States and abroad.

About this title

About the Author

Morgan Ricks is associate professor at Vanderbilt Law School. Previously, he was a senior policy advisor and financial restructuring expert at the US Treasury Department, a risk-arbitrage trader at Citadel Investment Group, a vice president in the investment banking division of Merrill Lynch & Co, and a corporate takeover lawyer at Wachtell Lipton.

Excerpt. © Reprinted by permission. All rights reserved.

The Money Problem

Rethinking Financial Regulation

By Morgan Ricks

The University of Chicago Press

Copyright © 2016 The University of Chicago
All rights reserved.

ISBN: 978-0-226-33032-7

Contents

Preface, 
Introduction, 
PART I. Instability, 
CHAPTER 1. Taking the Money Market Seriously, 
CHAPTER 2. Money Creation and Market Failure, 
CHAPTER 3. Banking in Theory and Reality, 
CHAPTER 4. Panics and the Macroeconomy, 
PART II. Design Alternatives, 
CHAPTER 5. A Monetary Thought Experiment, 
CHAPTER 6. The Limits of Risk Constraints, 
CHAPTER 7. Public Support and Subsidized Finance, 
CHAPTER 8. The Public-Private Partnership, 
PART III. Money and Sovereignty, 
CHAPTER 9. A More Detailed Blueprint, 
CHAPTER 10. Financial Reform Revisited, 
Notes, 
References, 
Index, 

CHAPTER 1

Taking the Money Market Seriously

Pure money ... is nothing else but the most perfect type of security. Bills of short maturity form the next grade, being not quite perfect money, but still very close substitutes for it. ... The rate of interest on these securities is a measure of their imperfection — of their imperfect "moneyness." — John Hicks, 1946

Are the instruments of the money market — the short-term debt instruments we have been calling cash equivalents — really money? The question seems to invite a semantic debate. It obviously depends on how one defines "money." Still, semantic debates can sometimes be useful; they can help to sharpen concepts. This is one of those cases.

Start with the textbook definition of money. That definition can be rehearsed by any student of introductory economics. Money is conventionally defined as the set of assets that can be readily used in transactions. In this regard the medium of exchange function of money is commonly said to be paramount. But cash equivalent instruments, unlike checkable bank deposits, generally do not function as a medium of exchange. Rather, they must be converted into the medium of exchange — by selling them or waiting for them to mature — before they can be used in transactions. In this respect, cash equivalents resemble other (nonmonetary) financial assets like stocks and longer-term bonds.

So, under the textbook definition, cash equivalents are not money. And some experts — perhaps many — favor sticking to this usage. Consider the following observations from a prominent macroeconomist regarding the Federal Reserve's (now discontinued) M3 monetary aggregate, which consisted of several important classes of cash equivalents: "Economists define 'money' as an asset that is used to pay for transactions. ... I have to confess that in a quarter century of teaching and research, I never had any occasion to make use of M3. It always seemed to me that this unambiguously failed the definition of an asset that is used to pay for transactions. If you're going to include such assets in your concept of 'money,' why stop there?"

Along the same lines, another well-known monetary economist recently had this to say about "money market": "I know that finance people and business people frequently use the words 'money market' to mean the market for short term bonds/loans. But when you are talking about models of monetary exchange, it is a really bad idea to use the words 'money market' in that way. What you really mean is 'bond market.'" This same economist has also said that "money market" is "just a weird slang name for the market in short-term bonds." And two other influential economists recently

Edition details

• Publisher: University of Chicago Press
• Publication date: 2016
• ISBN 10: 022633032X
• ISBN 13: 9780226330327
• Binding: Hardcover
• Language: English
• Number of pages: 336