P06　The monetary system collapses

Dynastic change/Recoinage → Currency crisis/Default

How does the manner of collapse teach us what supported the system?

Four Steps

These are the four steps for going beyond "it's similar." The "limitations" step defines the point beyond which historical analogies should not be drawn.

Read at the Modern Money Stations

Stations from the textbook "Modern Money: Whose Debt Is It?" where this structure appears. The four steps for each station are not displayed on the screen in the textbook. Here, you can read them side by side.

If a bank fails, what happens to the deposits?

1-06 / Modern Money　Present. Tokyo. Deposit Insurance Corporation.

Similarities

The nature of a deposit—that it will not be returned if the depository fails—has not changed since the era of money changers.

Differences

Today, a third party—insurance—draws a line, and within that line, the "bank's liability" is replaced by the "corporation's promise."

Applications

When you see a balance, check if it is for payment and settlement or a general deposit, and if it exceeds ten million yen at a single financial institution.

Limitations

Ten million yen is the current value in Japan, with an exception that it is multiplied by the number of banks for one year after a merger. The methods of failure resolution (e.g., insurance payment, financial assistance) are not covered.

Borrowing short to hold long

6-04 / Before 2008　2007 New York

Similarities

The fragility of the system of borrowing short-term and lending long-term has been a cause of bank runs since the era of money changers.

Differences

The borrowing was in the form of collateralized overnight repos, the lenders were MMFs and others, and there was neither deposit insurance nor a central bank account.

Applications

When you hear "leverage," distinguish between thinness of capital and shortness of borrowing term.

Limitations

Specific ratios and amounts could not be extracted from the report's PDF, so they are not cited at this stop.

What happens when the price of collateral falls?

6-05 / Before 2008　Summer 2007–September 2008, United States/Europe

Similarities

The dynamic where a fall in collateral value accelerates the flight of lenders is always present where there is collateralized lending.

Differences

The collateral was mortgage-backed securities, the lenders were MMFs and foreign banks, and the chain reaction spread globally overnight.

Applications

Read crisis reports starting with "what collateral's price has fallen?"

Limitations

The overall picture of causality is based on the committee's conclusions and the description by the NY Fed. The report also includes a dissenting opinion citing global capital flows as the main cause.

September 2019 — The day the repo rate spiked

5-05 / Repo and Collateral　September 2019 New York

Similarities

The phenomenon of interest rates spiking from a small shock when liquidity is thin has the same pattern as modern financial panics where cash dried up during harvest season, causing interest rates to soar.

Differences

The units of shock are government bond settlement dates and tax payment dates, and the response is the management of the size of the central bank's balance sheet.

Applications

When you see news that "the repo rate has surged," ask what was settled on that day and where the cash flowed.

Limitations

The estimates are the result of a regression in the note and depend on the period and definitions. They cannot be generalized to other countries.