Macroeconomics as a paradigm in large part is determined by what is measured... The way models are built, and the way people think, is determined in large part by what we measure... So it's hard to even imagine how you're going to build models if we don't measure things that are more directly associated with what we would like to know.
Andrew Sprung explores in detail Loughner's obsession with [currency]: "Firstly, the current governmental officials are in power for their currency, but I'm informing you for your new currency! If you're treasurer of a new money system, then you're responsible for the distributing of a new currency. We now know - the treasurer for a new money system, is the distributor of the new currency. As a result, the people approve a new monetary system which is promising new information that's accurate, and we truly believe in a new currency. Above all, have you your new currency, listener?"
It is relatively simple and intuitive to make the connection between Fed policy and wealth inequality. Whether through open market operations or direct lending through the discount window the first recipients of newly created money are the banks in the Fed system... this newly created money is first lent to their most creditworthy customers. In addition, the amount one can borrow is obviously a direct function of one's already existing net worth so it is the "wealthy" who are able to borrow these newly created funds first and at the lowest rate of interest... Those with access to better economic information, such as bankers with access to the Federal Reserve, are able to better navigate this world of floating monetary standards and gain outsize economic rewards.
Mehrling tells us that the Fed is now committed to supplying liquidity in money markets through its role as a dealer, on both sides of its balance sheet, and that is a critical shift in the nature of central banking. He discusses (pp.126-127) how the collateral behind the shadow banking system relied on CDS markets for its pricing. In Mehrling's account, insurance companies (including AIG) were indirectly serving as dealers of last resort, believing that they held invulnerable positions but nonetheless exposed. Investment banks, on their side, thought they held matched books but the higher and lower CDO tranches turned out to be less similar than they had been expecting, based on historical price risk. None of these expectations survived contact with the reality of the crash.
Now it's the central bank which sells AAA protection because eventually, in Mehrling's view, this activity cannot forever remain a private function (for a start, which insurer is itself safer than AAA?). A good and indeed central question to ask anyone who is proposing a financial system is to ask who will sell AAA insurance.
To quote Perry, the new Fed principle seems to be: "insure freely but at a high premium."
Mehrling also suggests that looking at the Fed's balance sheet, or its transactions, is misleading. The key question is what kind of liquidity dealing option the Fed is promising to the market.
I continue to ponder Mehrling's main claims, but in any case this is an important book about the new Fed.
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