The Monetary Fifth Column: The Eurodollar Threat to Financial Stability and Economic Sovereignty

Eurodollars are dollar-denominated deposit liabilities of banks outside the United States. Even though estimates of the size of the Eurodollar market exceed $5 trillion, these instruments are virtually unregulated. Legal scholarship has very little to say about Eurodollars, and the economic literature on the subject is geared toward economists and banking professionals rather than policy makers and attorneys. Furthermore, the economic scholarship is focused on describing the way Eurodollar markets function rather than critical examination of their nature and attendant risks. This Note is an attempt to get to the bottom of this ubiquitous yet mysterious financial instrument. It describes the nature and history of the Eurodollar and discusses potential challenges the Eurodollar market poses to financial stability and monetary sovereignty. It then examines the evolution of international bank regulation, pointing out why current measures are insufficient to address the risks posed by the Eurodollar. Finally, it considers possible solutions to these problems and proposes an approach to regulating the Eurodollar market consisting of a scheme of international reserve requirements

Angry Judges

Judges get angry. Law, however, is of two minds as to whether they should; more importantly, it is of two minds as to whether judges\u27 anger should influence their behavior and decisionmaking. On the one hand, anger is the quintessentially judicial emotion. It involves appraisal of wrongdoing, attribution of blame, and assignment of punishment-precisely what we ask of judges. On the other, anger is associated with aggression, impulsivity, and irrationality. Aristotle, through his concept of virtue, proposed reconciling this conflict by asking whether a person is angry at the right people, for the right reasons, and in the right way. Modern affective psychology, for its part, offers empirical tools with which to determine whether and when anger conforms to Aristotelian virtue. This Article weaves these strands together to propose a new model of judicial anger: that of the righteously angry judge. The righteously angry judge is angry for good reasons; experiences and expresses that anger in a well-regulated manner; and uses her anger to motivate and carry out the tasks within her delegated authority. Offering not only the first comprehensive descriptive account of judicial anger but also the first theoretical model for how such anger ought to be evaluated, the Article demonstrates how judicial behavior and decisionmaking can benefit by harnessing anger-the most common and potent judicial emotion-in service of righteousness

Endogenous Credit Cycles

We build a model in which verifiability of private debts, timing mismatch in debt settlements and borrowing leverage lead to liquidity crisis in the financial market. Central bank can respond to the liquidity crisis by adopting an unconventional monetary policy that resembles repurchase agreements between the central bank and the lenders. This policy is effective if the timing mismatch is nominal (i.e., a settlement participation risk). It is ineffective if the timing mismatch is driven by a real shock (i.e., preference shock).liquidity problem, timing mismatch, leveraging, liquidity shock, settlement risk, repurchase agreement, consumption shock

EXCHANGE-RATE POLICIES FOR DEVELOPING COUNTRIES: WHAT HAVE WE LEARNED? WHAT DO WE STILL NOT KNOW?

The 1997–1998 Asian crisis, with its offshoots in Eastern Europe and Latin America, has reignited the debate about appropriate exchange-rate policies for developing countries. One widely shared conclusion from this episode is that adjustable or crawling pegs are extremely fragile in a world of volatile capital movements. The pressure resulting from massive capital flow reversals and weakened domestic financial systems was too strong even for countries that followed sound macroeconomic policies and had large stocks of reserves. As a consequence, the polar regimes of a "hard pegs" (such as a currency board), or a clean float, are enjoying new popularity. This paper argues that, while currency boards or even dollarization may be justified in some extreme cases, they are not appropriate for all developing countries. The recommendations formulated on the basis of the Mundell-McKinnon criteria for the optimum currency are considered still sensible today. Currency boards face serious implementation problems. One is the choice of the currency to peg to and at what rate; another is the need to ensure stability of the domestic financial system in the absence of a domestic lender of last resort. Floating appears to have wider applicability. As Friedman already argued in the early 1950s,if prices move slowly, it is both faster and less costly to move the nominal exchange rate in response to a shock that requires an adjustment in the real exchange rate. But for exchange-rate flexibility to be stabilizing, it has to be implemented by independent central banks whose commitment to low inflation is credible. Ongoing depreciations that follow from imprudent of opportunistic monetary behaviour will surely come to be expected by agents, and hence will have no real effect; occasional depreciations that respond exclusively to unforecastable shocks will, almost by definition, have real effects. But floating also faces questions of implementation. Given that no central bank completely abstains from intervention in currency markets, what principles should govern such intervention? The paper elaborates on a number of points in this regard on which recent experience is likely to be instructive, but on which more research is needed. Finally, any exchange-rate regime, and especially one of flexible rates, requires complementary policies to increase its chances of success. In this context, some have suggested the use of capital controls; less controversial is the need for prudential regulation of the financial system and for counter-cyclical fiscal policy.

Shadow money and the public money supply: the impact of the 2007-2009 financial crisis on the monetary system

This article explores the effects of the political reactions to the 2007–2009 financial crisis on the monetary system. It chimes in with the view that shadow banks create ‘shadow money’, i.e. private substitutes for bank deposits. The article analyses how the three main forms of shadow money – money market fund shares, overnight repurchase agreements and asset-backed commercial papers – were affected by the short-term government intervention and medium-term regulation during and after the 2007–2009 financial crisis in the United States. The analysis reveals that the measures taken between 2007 and 2014 integrated some shadow money forms in the public money supply. In the year after the Lehman collapse, the initially private shadow money supply was either publicly backstopped or de-monetised as it had broken par to bank deposits. The public backstops took on the form of emergency facilities established by the Federal Reserve and guarantees proclaimed by the Treasury. Those backstops imply that the public institutional framework to protect bank deposits was extended to some forms of shadow money during the crisis. This tendency has continued in post-crisis regulation. Accordingly, the 2007–2009 financial crisis has triggered a paradigmatic change in the monetary system, attributable to the political decisions of US authorities

Bond-Market Strains Keep Traders on Edge

https://www.wsj.com/articles/bond-market-strains-keep-traders-on-edge-1158469660

The Political Economy of Private Credit Money Accommodation

Private credit money forms are debt instruments that co-exist alongside publicly provided forms of money and emerge de-centrally out of the lending activities of banks or non-bank financial institutions. In normal times, they are easily convertible into higher-ranking forms of public or commodity money. Throughout history, however, private credit money forms have repeatedly become subject to a run by investors who all at once tried to convert their private credit money balances into higher-ranking money. Such runs are an integral and unavoidable feature of the modern credit money system, which in its essence is a self-referential network of expanding, yet instable debt claims. To keep up the stability of the monetary system, governments had to react to these runs and in a range of instances decided to drag the private credit money form under the control of the state by ensuring that they do not break away from par. This study examines this process of 'accommodating' private credit money. It establishes a functionalist theory about the transformation of the modern monetary system. To understand how and why such accommodation occurred, it develops an ideal-typical model of private credit money accommodation and applies it on three cases in the respective centres of the global financial system: the 1797 Bank Restriction in England that accommodated bank notes; the 1933 Emergency Banking Act in the U.S. that accommodated bank deposits; and the realignment of policies by the Fed and the U.S. Treasury in the 2008 crisis, which accommodated overnight repurchase agreements and money market fund shares as ‘shadow money’. On the basis of those case studies, the study argues that today’s public credit money supply is made up of accommodated, formerly private, credit money forms