Week 12 — Lectures 21 & 22, Reading 11

We're discussing the following for week 12:

Lecture 21 Shadow Banking, Central Banking, and Global Finance

Lecture Slides
Everything in the shadow-banking system is a market price. Derivative dealers and their swap books are central to the modern market-based shadow-banking system. It's the derivative dealers who need a backstop.

Lecture 22: Touching the Elephant: Three Views

Lecture Notes
The economics view explains how the past determines the present. The finance view explains how the future determines the present. The money view explains how the present—by virtue of the pattern of cashflows being locked in—determines the present. Evolution from Fischer Black: Market liquidity is not free. It comes from the dealer system. And the dealer system depends on funding liquidity, which comes from the central bank.

Reading 11: *Bagehot Was a Shadow Banker: shadow banking, Central Banking, and the Future of Global Finance by Mehrling, Pozsar, Sweeney, and Neilson (2014)

NOTE: The above link is the final published 2014 version of the paper instead of the 2013 version included in the Coursera materials. Mehrling says that this paper supersedes the content from Lecture 21.

Study Questions
A big thing that this article brings in over and above Lecture 21 is the comparison to Bagehot's world, which we learned about in Lecture 9.

Money and Banking Summer 2021 Reddit Master Thread