Course Link: https://www.coursera.org/learn/money-banking/
What is a Bank, a Shadow Bank, a Central Bank?
|Assets (Liquidity)||Liabilities (Solvency)|
|Cash Reserves||Net worth|
|RMBS (Residential Mortgage Backed Securities)||Money Market Borrowing|
|IRS (Interest Rate Swaps)||- RP (Repurchase Agreement)|
|CDS (Credit Default Swaps)||- ED (Eurodollars)|
|- ABCP (Asset-Backed Commercial Paper)|
The Four Prices of Money
- Par, today
- Interest rate, future
- Exchange rate, foreign
- Price level, commodities
"All banking is a swap of IOUs"
Hierarchy of Financial Instruments
- Ultimate money: gold
- National currency: promise to pay gold
- Bank deposits: promise to pay currency on demand
- Securities (credit): promise to pay currency in the future
- From bank's perspective, deposits and securities are credit.
- From consumer's perspective, only securities are credit.
- From international monitory's perceptive, currency, deposits and securities are credit.
Hierarchy of Financial Institutions
- Outside money: gold
- Inside money is some form of credit
Dynamics of the Hierarchy
- Horizontal axis represents quantity
- Vericle axis represents quality
- In a economic boom, credit expands and qualitative difference becomes less as the hierachy flattens; it contracts in economic slowdown.
Discipline and Elasticity, Currency Principle and Banking Principle
- Scarcity of (ultimate) money; discipline
- Elasticity of (derivitive) credit
History of Market Makers
- Security dealers: interest rate
- Banking system: par
- Central bank: exchange rate
Managing the Hierarchy
- Central bank: lender of last resort
- What do central banks do?
- Exchange rate