- affiliated with Queen Mary’s University, London.
- Focus on income inequality and profitability
Money and banking
- Traditional money theory is a progression from barter to money to credit.
- But incorrect theory: in C19 France used all three
- Rural economy= barter
- National economy = silver (eg trade on roadside etc)
- International economy = bill of exchange
- Medieval tally sticks were used as a way of recording debts. Wooden sticks inscribed and split in half so debtor would hold the “foil” and the creditor would hold the “stock.” The tally was worth the agreed money in it’s own right so that soon it became circulating until it was utterly separate from the original transaction.
- tally sticks destroyed in fire purposefully
- = thought experiment
- if digital monetary records are destroyed, what opinion would the future historians hold?
- The development of central banking followed the challenges between private/ monarch and state money
- UK 97% “broad money”
- Lending creates deposits to lend
- testified to US Senate FCIC “worst since Great Depression but actually privately thought it was the “worst crisis in human history” due to the number of insitutions involved and the broad effects it had
Explanations of the financial crisis
- misaligned incentives,
- deregulation leading to excessive leverage
- In the whole sale money markets,
- bondholders wanted cash (liquidity)
- cash holders wanted bonds (security)
At the end of the Great Depression, the banking industry was heavily regulated. The 3-6-3 rule dominated, leading to monopoly profits.
At end of 70s the deposit and loan sides of banking became under pressure:
- on the corporate loans side, junk bonds (JB) and commercial bonds (CB) got issued because…(?)
- jb- short term
- cb- long term
- deposit side, deposit rate ceilings meant that banks lost profits to the money market mutual fund MMMF, due to JB and CB.
- there was a demand for bank liquidity due to falling bank profitability.
therefore in 80s the markets became deregulated.
- debt generating a flow of payments can be securitised and transformed into an asset to be traded as a bond.
- bonds depend on the underlying source of payments (eg mortgage payments)
- is a large and growing market:
- 1985= $1.2 bn
- 2005= $1 949.9bn
Restructuring of banks 80s
- originate to hold models became orginate to distribute models
In financial crisis, Deuche bank securitised the purchase of credit default swaps. Ie they bet against those who bet against deuche bank.
Link to inequality:
- 1% income earners as a proportion of GDP increased from 1987 to 2008 worldwide, and so became large holders of cash
- Cash could be spent on
- commercial papers,
- commeical bank deposits
- US treasury (China and SE Asia held stocks too high)
- Cash could be spent on
- Increase in cash pools due to inequality
Neoliberalism financial system
- origins 70s-79
- ascension: 79-89
- decline 89-07
- collapse: 07-16
US house bubble caused the crisis via repo
- repo= repurchase agreement of a sale with securities with the agreement that the same security will be bought back at an agreed higher price in the short term future.
- 1 borrowers could not refinance
- 2 cash flows were under complex securities and dried up