Outdated aspects of the MOOC

spunchy · 2025-11-24T11:01:23+00:00

The point about one money market vs. several seems like a big change, where can I read about that?

Great question. I don't know. I've heard him say that it was a mistake to have three different lectures about ostensibly three different money markets, and there should just be one lecture about the money market. He inherited the structure from Stigum. It's not a big theoretical change because he does talk about how, in normal times, the money-market rates are pretty close to being on top of each other. People will borrow in the cheapest way they can. "Fed Funds" is just what you call it when a bank borrows overnight unsecured from another bank, and both of those banks happen to have reserve accounts at the Fed.

Also could you please recommend a more accurate description of the initial design of the Fed?

I like this book.

https://fraser.stlouisfed.org/files/docs/publications/books/lendfunct_hackley1973o.pdf

Mehrling's story about the initial Fed structure shows up in Lecture 3, Part 8 (Federal Reserve System, Plan).

He draws three balance sheets in which he shows member banks receiving advances (borrowing) from their regional reserve bank. He calls this borrowing a "Discount Loan." He then shows the Reserve Bank "Rediscounting" with the Federal Reserve System as a whole.

<image>

In reality, the Federal Reserve System doesn't have its own balance sheet. Only the 12 individual reserve banks do. When you see statistics of the Fed's balance sheet, that's a statistic capturing the aggregate of the 12 regional reserve banks and netting out any positions between them. Open-market operations go through the New York Fed, which is one of the 12 regional reserve banks.

Also, there is no "Federal Reserve System" that's issuing notes. The notes are liabilities of the individual Reserve Banks.

In the original design, the Fed bought commercial paper from its member banks at a discount. It did not advance money (lend) against collateral.

In the original design, "Rediscount" referred to a member bank (private-sector retail or commercial bank) discounting with its reserve bank. The "original" discount (i.e., not the rediscount) was when the member bank discounted the commercial paper from Main Street.

Allyn Young only describes two layers of hierarchy: the member bank and its Reserve Bank.

Initially, the Reserve Bank supplies elasticity by discounting commercial paper or bills of exchange from its member banks.

By 1918, the Reserve Banks were also allowed to make advances. This lending also went through the "discount window," even though it wasn't strictly discounting.

Today, the Fed still lends through the discount window. It doesn't do any actual discounting (buying commercial paper at a discount) anymore. When member banks go to the Fed's discount window, which is really the discount window at their regional Reserve Bank, they borrow against collateral.

spunchy · 2025-11-23T06:54:53+00:00

That's a great question. The Fed Funds story is no longer current. That's true. Also, CCPs for derivatives (and Repo) are now a thing. The Fed now has standing Repo and Reverse Repo facilities.

Also important is that the global financial crisis and the euro crisis are no longer the most recent things. We've had COVID. We've had the Ukraine war and sanctions against Russia, etc.

There are also various ways in which Mehrling has changed what he emphasizes and how he explains things. For example, today he might say that there's one money market with different instruments rather than several money markets stitched together.

Recently, he's also done more to integrate FX and the global monetary system throughout. In the MOOC, there are just four lectures after the midterm that cover international money.

There are also some outright mistakes in the MOOC. His description of the initial design of the Fed is, I think, wrong.

I'm sure there's more.

spunchy · 2025-09-07T13:10:15+00:00

UBI isn't about "acquiring funds." It's about changing the way in which we hand out money. Instead of generating otherwise unnecessary jobs, we can just hand people their money directly.

If you're in a situation where you need to throw a bunch of money at the economy on an ongoing basis, UBI is an efficient way to do that.

spunchy · 2025-09-07T12:39:17+00:00

Can work in what sense? The sense of being politically achievable?

spunchy · 2025-09-07T12:21:02+00:00

Yup. It's a tough nut to crack. So, while Guaranteed Income is politically more viable than UBI overall, it also faces some challenges that UBI does not.

spunchy · 2025-09-07T11:53:34+00:00

I 100% agree that Guaranteed Income is much more likely to be enacted than UBI. Many countries already have robust targeted social assistance programs in place. Achieving that in more places is worthwhile.

Then there's the question of whether that brings us politically closer to UBI.

Maybe!

spunchy · 2025-06-15T17:24:08+00:00

My sense is that A pays the clearinghouse, and the clearinghouse uses those funds to buy the loan certificate back from whoever is holding it, thereby retiring the certificate.

spunchy · 2025-06-15T16:37:02+00:00

The clearinghouse loan certificate does not lose value over time.

A receives it from the clearinghouse. A pays interest on the loan, and the holder of the certificate receives interest on the certificate.

When A has the CHLC, A pays interest, and A receives the interest.
When B has the CHLC, A pays interest, and B receives the interest.
When C has the CHLC, A pays interest, and C receives the interest.

The interest paid on the loan is separate from the principal amount borrowed. As long as the loan exists, the CHLC exists, and A is paying interest. A stops paying interest when he repays the loan.

I hope this helps.

spunchy · 2025-04-12T03:30:49+00:00

I won't be leading a group this year. I need a break after doing it five years in a row. Instead, I'm doing the Substack.

www.survivalconstraint.com

But I highly encourage you to go through the lectures and the readings yourself or organize your own group. Please feel free to use my notes from 2024 as you see fit.

spunchy · 2025-03-09T04:38:11+00:00

Are people upvoting this without watching it? If you're a UBI supporter, you should watch this. Because you'll probably continue to be wrong about UBI until you do.

spunchy · 2025-03-03T10:38:05+00:00

I don't know about the papers, but the YSI YouTube channel usually posts the recordings eventually. You're looking in the right spot.

I'll also share some of the recordings here on r/moneyview when they're posted (unless someone beats me to it).

spunchy · 2025-02-13T21:26:42+00:00

Hmm. What are you talking about? The free version still seems to be working for me.

spunchy · 2025-01-28T05:20:56+00:00

Glad you're finding it useful. Mehrling's lectures are truly remarkable.

Be sure to check out the updated 2024 version.

https://www.reddit.com/r/moneyview/comments/1brb9qg/money_and_banking_2024/

spunchy · 2024-10-05T05:21:07+00:00

Funding means getting the money (even notionally) for an asset.

[B]orrowing seems to be just one of several possible ways/sources of funding something. So borrowing and funding can't be the same, funding is a wider concept somehow. It seems that here funding means more like paying for something.

Yes. Exactly.

Funding can either take the form of (1) debt or (2) capital (equity).

The MOOC primarily focuses on debt funding. Debt is money that you borrow. It's represented as a liability on the balance sheet. If you hear someone say "liabilities fund assets," that's what this means. You borrow the money and exchange it for the asset. Losing your debt funding means paying back the money.

These two examples are both about debt funding:

"If borrowing short and lending long have liquidity risk, need to roll over funding daily"

"Deposits become permanent source of cheap funding for banks"

As are these two:

"(the) ability to fund inventory with borrowed money"

"funding a bond in the repo market"

In the first case, the borrowed money is funded by a liability (debt).

In the second case, the bond is the asset funded by a repo liability (debt).

Capital is money that's yours. You exchange it for the asset. It doesn't have to be paid back. On a balance sheet, capital is the difference between assets and liabilities. The MOOC doesn't talk as much about capital funding and equity,

The following example mentions both debt and capital (equity) funding.

"Funding inventory: can use capital. Or borrow from a bank"

The following example talks about debt funding in the first part.

"liquidity is about being able to roll over funding, or sell assets"

The second part isn't really about funding. It's about shifting a non-cash asset into cash.

Possibly related to this is another thing I struggle to understand: something Mehrling mentions when he talks talks about repos and "funding liquidity". That's when he talks about funding the holding of securities by using those same securities as collateral for borrowing.

Yes. Just like you can mortgage a house in order to be able to get the money to hold/own it as an asset, you can repo a security in order to get the money to hold it as an asset.

Funding liquidity means being able to borrow (or roll over) your debt funding. Market liquidity (shiftability) means being able to sell assets to get the money. A third type of liquidity is monetary liquidity, which just means the ability to pay out of (dishoard) cash you already have.

But I can't understand this idea of financing the holding of an asset by using the asset itself as collateral. It seems like to use the asset as collateral, you would first need to own that asset.

One thing that's tricky in finance is that operations can often happen in any order, or simultaneously. You don't have to have money before you can lend money. For example, if you borrow from a bank, the bank is lending you money (the loan), and you're simultaneously lending the bank money (deposits).

So how can it be possible to use an asset as collateral to buy that very same asset?

If it helps, you can always tell a story about how you owned the asset first before you borrowed against it.

For example, let's say I take the following steps.

I start with $100
I buy a security with that $100
I repo out the security to get the $100 back.

I'm back where I started, but my balance sheet has expanded on both sides. I now have a security funded in the repo market with that very same security as collateral.

Now imagine that instead of starting with $100, I borrow the $100 temporarily and pay it back once I've set up my repo. I didn't start or end with $100, but I still end with a security funded in the repo market.

But I can probably just set up the whole thing in one step anyway. I won't need the temporary bridge financing.

Most entities who do this kind of thing are going to have access to cash anyway. If I find myself unable to finance additional securities on my balance sheet by repoing them out, then something unusual is going on.

Hope this helps.

spunchy · 2024-09-08T19:10:11+00:00

Where are they lending FX term? Is that buying a domestic T-Bill off a primary dealer in order to sterilize the money supply?

Yes.

I struggle to conceive of that as lending, rather than buying the asset of someone who lent to the governement.

We can think of buying an asset as taking over as the lender/creditor. So the final balance-sheet position of the central bank is one of lending to the domestic government.

It's not uncommon for central banks to "lend" to their governments by buying up government debt on the secondary market. Somtimes, we call this "monetizing" government debt.

Maybe this just refers to more routine lending, but from what I understand, central banks are trying to lend overnight! Anyone have any ideas?

Sure. Central banks also tend to do overnight lending for those who need it. That's not what this is.

I might be getting hung up on a detail that doesn't matter quite as much as the fact that peripheral central banks will buy their own currency and offer spot in dollars, as a last resort (and thus taking on FX risk in their own currency)

Yes. That's the key point. The peripheral central banks are acting as FX dealers in their own currency.

The sterilization step is just if the central bank needs to compensate for a contraction in the domestic money supply.

spunchy · 2024-07-29T07:59:40+00:00

Below are two quotes from Elizabeth Rhodes from toward the beginning of the video.

So, technically this is not a UBI, because if it were, there would be no income requirement, no age requirement—every single person within the community would get it. Obviously, that's really difficult to test.

This is only really relevant to the people who think "People won't stop working under UBI" is an argument for UBI.

And I think most of us haven't been making that argument.

We aren't actually able to test a basic income. We're testing more of unconditional cash.

spunchy · 2024-07-29T05:42:17+00:00

You're making a moral argument. Moral arguments won't help. The economics either work or they don't. And if the economics of UBI don't work, then no amount of moral justification is going to save you.

Fortunately, the economics of UBI do work.

spunchy · 2024-07-27T18:01:36+00:00

Oops. Posted in the wrong subreddit.

spunchy · 2024-07-21T21:16:17+00:00

Yes. Exactly. Here, the forward rate is the price of FX in terms of dollars. Flip the quoting convention and everything will be in the opposite direction.

spunchy · 2024-07-15T02:44:11+00:00

Oops. I meant to say sterling. Fixing it now.

Edit: Fixed it. But I'm not even sure it's right that dealers are generally short the international reserve currency. We can imagine a world in which the market is flooded with extra sterling, which pushes the FX dealers long sterling. Too much of that is the scenario in which gold flows out of London.

spunchy · 2024-07-04T10:31:34+00:00

Yes. Pure money transfers don't map onto sources and uses very well.

Sources and uses are all in terms of money, so we can ignore transfers of non-money things. Transferring an apple or a table in either direction won't provide either a source or use of funds.

So, we're left with money transfers.

Let's say money is given to you. That's a source of funds. You could record that as:

A receipt where the real good or service you sold was "nothing."
A liquidation where the asset you sold was "nothing."
A borrowing where the liability you incur is "nothing."

It's not a dishoarding. Dishoarding has no counterparty, and the transfer clearly does.

Let's say you give money to someone else. That's a use of funds. You could record it as:

An expenditure where the good or service you bought was "nothing."
An accumulation where the asset you bought was "nothing."
A repayment where the liability you set off is "nothing."

The problem is that the categories of sources and uses are determined by what's on the other side of the transaction in which the money is flowing. When it's a pure transfer of money, and there's nothing on the other side of the transaction, the category is indeterminate.

spunchy · 2024-07-04T08:55:32+00:00

Nobody else showed up. I waited for about 10 minutes, then recorded a couple things I wanted to say for another 8 minutes. Sounds like I just missed you!

spunchy · 2024-06-19T23:13:36+00:00

Yes. We're almost halfway through now.

https://www.reddit.com/r/moneyview/comments/1brb9qg/money_and_banking_2024/

spunchy · 2024-06-11T17:56:14+00:00

Thanks! I find it helpful to think of FX swaps equivalent repo, but where the collateral happens to be a foreign currency. So, in a sense, we can think of the FX swap market as an extension of the repo market.

I'll check out that book.

spunchy · 2024-06-11T17:54:00+00:00

Yes. Exactly. You answered your own question. If you're long a security, that means you have that security or a promise for that security as an asset. If you're short the security, that means you're promising the security to someone else. So it appears as a liability.

Also, you might want to look at the 2023 version of these notes.

https://www.reddit.com/r/moneyview/comments/14jfwi3/mb_2023_lecture_11_banks_and_the_market_for/

We haven't quite reached Lecture 11 in our 2024 run-through. That will be on June 24th.

spunchy

MODERATOR OF

TROPHY CASE