Response to WSJ Comments…”What’s Money?”

Thank you for your interest in my letter highlighting how determinants of inflation can be better understood.  To clarify, two types of money exist ‘state money’ produced by the Fed and ‘bank money’ created by the private sector.  Bank money drives growth. Today, bank money includes the service value of traditional commercial bank products such as deposits as well as shadow banking services such as commercial paper, money market funds, and repurchase agreements. In fact, what constitutes money may change over time as new financial products are introduced.

So, it is essential that the Fed, economists, and market participants measure and monitor both state and bank money.  CFS Divisia accomplishes this feat by identifying assets that serve as money.  Importantly, not all of these monetary assets provide equal amounts of service as money to the economy.

Bill Barnett uses the example of measuring the service value of transportation.  Would a pair of roller skates and a locomotive provide equal value to the economy?  No.  So, CFS Divisia derives weights that vary over time.

For the theory, history and math behind CFS Divisia, please see Bill’s book Getting It Wrong

For a practical application of CFS Divisia see

WSJ: What’s Money?

The Wall Street Journal weekend edition printed my letter highlighting how determinants of inflation can be better understood.

CFS Divisia money growth warned about rising inflation and clearly explained why it was low coincident with QE.

To be clear, CFS Divisia money monitors the output of the financial system and its role in the monetary transmission mechanism.  It is an essential barometer of the economy, whether one is a market practitioner, Keynesian, or monetarist.

Read the full letter – It May Make the World Go Round, but What’s Money

An Interview with William A. Barnett

CFS Director William A. Barnett is interviewed by Apostolos Serletis.  The conversation covers Bill’s life as a rocket scientist, work at the Federal Reserve Board, pioneer of monetary aggregation and complex dynamics, founding journals and societies, work at CFS, and more.

The interview is similar in construct to discussions with eminent economists in Bill’s book co-edited with Nobel Laureate Paul Samuelson – “Inside the Economist’s Mind.”

To view the full interview:

I hope that you find the exchange about Bill and his remarkable career informative and enjoyable.

Bank of England conference in honor of William A. Barnett – Call for papers extended

We are delighted to announce a conference in honor of CFS Director William A. Barnett at the Bank of England on May 23 – 24, 2017.

The call for papers has been extended to March 15, 2017.

Liquidity plays a pivotal role in financial markets, the banking sector, and the economy as a whole. Since the 2008-09 financial crisis, it has become increasingly necessary to understand the creation, dissemination, measurement and management of liquidity.

This conference seeks and invites proposals to understand and assess the macroeconomic implications of liquidity, the liquidity creation process, and the impacts of liquidity on financial markets and economic activity. Theoretical, empirical, quantitative, qualitative, institutional, and historical perspectives that address current theory and policy questions are welcome.

For details to attend the conference or submit papers:

Similarly, excellent peer reviewed papers will be considered for a special issue of the Journal of Financial Stability.

Today’s WSJ: ‘Focusing on Bank Size, Missing the Real Problem’…

Today, The Wall Street Journal published an op-ed titled “Focusing on Bank Size, Missing the Real Problem.”

CFS Board Member and former Treasury Under Secretary Randal Quarles and I note how:

The new president of the Minneapolis Federal Reserve Bank, Neel Kashkari, along with Bernie Sanders, Elizabeth Warren, and Sherrod Brown believe that breaking up “too big to fail” institutions or turning them into regulated utilities is the only way the country can be confident that the 2008 bailouts won’t be repeated.

This proposal is misguided.

We offer three solutions:

– Facilitate orderly liquidation of failing or failed banks.
– Adopt a monetary policy rule to reduce the incentive for banks to take dangerous risks.
– Fully measure and evaluate the impact of Dodd-Frank before arbitrarily taking an ax to big banks and irreparably damaging the economy.

View the full article.

Pulling Away Punch Bowls

Ike Brannon – from Capital Policy Analytics – wrote a review for the Weekly Standard of the recent CFS publication Wall Street, the Federal Reserve and Stock Market Speculation: A Retrospective by Elmus Wicker.

To read the review, click here:

To read the monograph, click here:

Release – Wall Street, the Federal Reserve and Stock Market Speculation: A Retrospective

Today, the Center for Financial Stability (CFS) is delighted to release Wall Street, the Federal Reserve and Stock Market Speculation: A Retrospective — a new monograph written by Professor Elmus Wicker.

Professor Wicker’s ideas about the Federal Reserve and financial markets are of special interest now, as:

– The Federal Reserve is poised to raise its policy interest rate for the first time since the onset of the Great Recession; and

– Central banks around the world are on the verge of gaining new macroprudential powers.

Wall Street, the Federal Reserve and Stock Market Speculation: A Retrospective provides historical insights on the interplay between the stock market and the Federal Reserve as well as fodder for further study and debate.

We thank Jordan Wicker, Ike Brannon, and Kurt Schuler for help in bringing the manuscript to print.

For the full monograph in electronic format:

WSJ / Trump on Yuan and Hacking…

Today “The Wall Street Journal” published a letter “Trump’s Right on Hacking, Wrong on Yuan” by Kevin Brock (CFS senior fellow / cybersecurity strategy) and me on page A18.

Donald Trump’s “Ending China’s Currency Manipulation” (op-ed, Nov. 10) mistakenly conflates cyberbreaches and currency manipulation.

View the full letter.

Sincerely yours,
Lawrence Goodman

Center for Financial Stability, Inc.
1120 Avenue of the Americas, 4th floor
New York, NY 10036

NYU Finance Professor Praises Derivatives

In a policy paper titled “In Defense of Derivatives: From Beer to the Financial Crisis,” New York University Clinical Professor of Finance Bruce Tuckman extolled the benefits of derivatives. “Policies that recognize the usefulness of derivatives and of holistic risk management and supervision,” he wrote, “will encourage businesses to use derivatives appropriately and, at the same time, reduce systemic risk.”

Professor Tuckman made the following arguments against several regulatory initiatives:

  • mandatory clearing may break apart bilateral portfolios that previously had comprised diversified combinations of liquid products (that now must be cleared) and illiquid products (that cannot be cleared);
  • imposing punitive margin requirements on uncleared derivatives might reduce derivatives volumes and risks, but also can increase nonderivative business risks; and
  • “required databases of derivatives trades and positions are unlikely to be useful in crisis prevention and management because they focus on a one-dimensional slice of firm and system-wide risks.”

He also recommended possible reforms that could reduce systemic risk without impairing the business uses of derivatives, including:

  • joint work by authorities and the industry to create common entity identifiers in order to improve firms’ and regulators’ abilities to manage holistic counterparty risk;
  • “a protocol to coordinate the liquidations of a failing firm’s most liquid derivatives and nonderivative claims”;
  • making the compression of over-the-counter derivatives positions a higher priority;
  • improving accounting norms in order to provide better holistic risk reporting, which would incorporate derivatives exposures; and
  • a narrowed safe harbor for derivatives to prevent the providers of illiquid leverage from being subsidized by their ability to circumvent the bankruptcy system.

Lofchie Comment: This excellent article should be read by anyone who is involved in financial regulation, whether at the political or regulatory level (or in the press).

Professor Tuckman is clear and to the point in his explanations as to (i) the benefits that derivatives provide (as well as their potential risks); (ii) the limited role that derivatives played in the financial crisis; and (iii) why a number of the measures taken by financial regulators to address systemic risk (e.g., mandatory central clearing) very likely did nothing or made the situation worse. (See recent article that included a statement by FDIC Vice Chair Thomas Hoenig, who is himself a proponent of mandatory central clearing, in which he effectively concluded that mandatory clearing was not effective in reducing systemic risk)..

If the economy is ever going to fully recover, then the people involved in its recovery must have a reasonable understanding of how financial products and markets work. Only on that basis is it possible to have a meaningful discussion about how to make the products and markets work better (or at least how not to undermine them). This article takes a significant step in that direction.


CFS Discussion on “America’s Bank” with Author Roger Lowenstein…

The Center for Financial Stability (CFS) thanks Roger Lowenstein for “America’s Bank: The Epic Struggle to Create the Federal Reserve.” “America’s Bank” is a gift for anyone interested in understanding the nuances and struggles behind the creation of the Federal Reserve.

Perhaps, of greatest importance, “America’s Bank” highlights lessons for today’s Fed stretching from governance to the size of the institution relative to the economy.

We are grateful to Roger Lowenstein for sitting down with CFS.  The following are excerpts from the conversation.

Best regards,
Lawrence Goodman

Lawrence Goodman
Center for Financial Stability, Inc.
1120 Avenue of the Americas, 4th floor
New York, NY  10036
1 212 626 2660