On China’s Financial System and Property Markets: Aliber and Walter

We are delighted to share work presented in recent days by two good friends of the CFS: Robert Z. Aliber and Carl E. Walter.

Carl discussed his forthcoming book The Red Dream: the Chinese Communist Party and the financial deterioration of China. Red Dream analyzes 1) the build-up of leverage throughout the system, 2) how regulators have worked to generate strong performance metrics while sloughing off unwanted assets, 3) the health of the financial system, as well as 4) the present within the context of prior financial stressors in the U.S., Japan and China itself.

Bob offers his latest thoughts on China’s property market, Evergrande, and future economic prospects more broadly. He first discussed these dynamics in the epilogue of the seventh edition of Manias, Panics and Crashes: A History of Financial Crises.

Carl recently served as an independent director of a major Chinese bank. For many years, Carl worked in China, where he last served as JP Morgan’s China COO and CEO of its banking subsidiary. He is now a visiting scholar at the Stanford Shorenstein Asia Pacific Research Center.

Bob is professor emeritus of International Economics and Finance at the University of Chicago. He has written extensively about the prices of currencies, international investment flows, banking issues, the multinational firm, international monetary arrangements, and financial crises.

To view Carl’s slides on China’s financial system:

To view Bob’s “The Ponzi Bubble in China’s Property Market is Deflating”:

As these topics are complex and challenging, we look forward to any comments you might have.

President Biden Signs Executive Order on Digital Assets

President Joseph R. Biden signed an “Executive Order on Ensuring Responsible Development of Digital Assets,” which outlined a “first ever, whole-of-government approach” to address the risks and potential benefits of digital assets.

In an accompanying Fact Sheet, the White House identified seven key priorities:

  1. The protection of U.S. consumers, investors and businesses. The President directed Treasury to assess and develop “policy recommendations to address the implications of the growing digital asset sector and changes in financial markets for consumers, investors, and businesses, while promoting equitable economic growth.”
  2. The protection of U.S. financial stability and mitigation of systemic risk. The President directed the Financial Stability Oversight Council to “identify and mitigate systemic risks posed by digital assets and to develop recommendations to address any regulatory gaps.”
  3. The mitigation of illicit finance and national security risks. The President directed all relevant U.S. Government agencies to give an “unprecedented focus of coordinated action” in order to mitigate all risks associated with digital assets.
  4. The promotion of U.S. leadership in the global financial system. The President directed the Department of Commerce to establish a framework for Government agencies to use to promote U.S. technology and economic competitiveness.
  5. The promotion of equitable access to safe and affordable financial services. The President directed the Secretary of the Treasury to produce a report on digital money and payment systems that would include the “implications for economic growth, financial growth and inclusion,” including as to “the risk of disparate impact to communities who have a long standing history of insufficient access to safe and affordable financial services.”
  6. The support of the U.S. Government to ensure technological advances and the responsible development of digital assets. The President directed government agencies to take definitive steps to develop and implement digital asset systems while prioritizing the data privacy, security and exploitation of investors.
  7. The exploration of a U.S. Central Bank Digital Currency (“CBDC”). The President directed U.S. Government agencies to analyze the “technological infrastructure and capacity needs for a potential U.S. CBDC in a manner that protects Americans’ interests.”

Issuance of the Executive Order was accompanied by supportive statements from numerous senior U.S. government and regulatory officials including Treasury Secretary Janet Yellen; National Economic Council Director Brian Deese and National Security Advisor Jake Sullivan; Senate Banking Committee Chair Sherrod Brown; CFTC Chair Rostin Behnam; and CFPB Director Rohit Chopra.


According to the Executive Order, digital assets have implications for climate change, financial growth, financial inclusion, illicit finance, international engagements, democratic values, global competitiveness, and much more. The Executive Order tells us that the United States must be a “global leader [in the] development and adoption of digital assets and related innovation” but we must also develop very substantial regulatory systems.

In light of the above, the President is requiring the involvement of at least eight different Cabinet members, numerous agencies, and every federal financial regulator, among others, to formulate policies. Given the sheer number of agencies to be involved, the complete diversity of interests to be considered, and the absence of any prioritization of those interests, the Executive Order does not actually provide much in the way of direction.  

While a possible interpretive theory is that this Executive Order will move the United States to develop a more digital-friendly regulatory system, it is equally possible that the Order signals very significant additional regulation. (See, e.g. SEC Commissioner Lee’s recent description of the digital asset industry as one that has grown by “largely def[ying] existing laws and regulations,” suggesting many new regulatory proposals to come.) Further, the Order’s frequent references to climate change may be understood as just “politics as usual,” or as many expect, a precursor to regulation on energy usage for mining.  

The Executive Order does seem to indicate federal movement toward the development of a Central Bank Digital Currency. Section 4 of the Executive Order is devoted to this topic and there are numerous other references to the issue throughout the Order. It would seem that some more specific proposal is likely imminent on this topic. 

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Primary Sources

  1. Executive Order on Ensuring Responsible Development of Digital Assets
  2. FACT SHEET: President Biden to Sign Executive Order on Ensuring Responsible Development of Digital Assets
  3. White House Press Brief: Background Press Call by Senior Administration Officials on the President’s New Digital Assets Executive Order
  4. Statement by Secretary of the Treasury Janet L. Yellen on President Biden’s Executive Order on Digital Assets
  5. Statement by NEC Director Brian Deese and National Security Advisor Jake Sullivan on New Digital Assets Executive Order
  6. Brown Applauds President Biden’s Crypto Executive Order
  7. CFTC Public Statement: Statement of Chairman Rostin Behnam on the President’s Executive Order on Digital Assets
  8. CFPB Director Chopra Statement on President Biden’s Digital Assets Executive Order

CFS Monetary Measures for January 2022

Today we release CFS monetary and financial measures for January 2022. CFS Divisia M4, which is the broadest and most important measure of money, grew by 5.6% in January 2022 on a year-over-year basis versus 5.0% in December.

For Monetary and Financial Data Release Report:

For more information about the CFS Divisia indices and the data in Excel:

Bloomberg terminal users can access our monetary and financial statistics by any of the four options:

3) ECST –> ‘Monetary Sector’ –> ‘Money Supply’ –> Change Source in top right to ‘Center for Financial Stability’
4) ECST S US MONEY SUPPLY –> From source list on left, select ‘Center for Financial Stability’

Money in The Wash Post

Congratulations to David J. Lynch at The Washington Post for being the first in a major news outlet, as far as we are aware, to ask the question “why does the Fed ignore the money supply”?

The piece covers much ground, references Bill Barnett’s work as CFS director of Advances in Monetary and Financial Measurement (AMFM), and quotes Steve Hanke, CFS special counsellor and Johns Hopkins professor.

Yet, misconceptions exist. Lynch frames monetarists versus “all but the monetarists” and “conservative critics” versus others. He is correct. Sadly, this is the narrative.

However, CFS Divisia monetary aggregates and liability measures vividly illustrate how Fed policy transmits through the financial system and into the real economy. That’s it. They have been exceedingly helpful at analytically and dispassionately identifying trades and how the economy responds to policy.

CFS monetary data and optimal uses are vehemently non-partisan.

We look forward to any comments you might have.

To view the full article in the Washington Post:

CFS Monetary Measures for December 2021

Today we release CFS monetary and financial measures for December 2021. CFS Divisia M4, which is the broadest and most important measure of money, grew by 5.2% in December 2021 on a year-over-year basis versus 5.4% in November.

For Monetary and Financial Data Release Report:

For more information about the CFS Divisia indices and the data in Excel:

Bloomberg terminal users can access our monetary and financial statistics by any of the four options:

3) ECST –> ‘Monetary Sector’ –> ‘Money Supply’ –> Change Source in top right to ‘Center for Financial Stability’
4) ECST S US MONEY SUPPLY –> From source list on left, select ‘Center for Financial Stability’

SEC Chair Addresses Dynamic Regulation and Market Modernization

SEC Chair Gary Gensler urged regulators to update policy and monitor economic changes as part of a dynamic approach to regulation.

In prepared remarks before the Exchequer Club of Washington, D.C., Mr. Gensler highlighted two principles important to dynamic regulation: efficiency in capital markets and rules modernization.

On capital markets efficiency, Mr. Gensler noted the SEC’s role in promoting fair markets by lowering the costs of financial intermediation. He encouraged greater competition and transparency as key pillars of efficiency, and directed SEC staff to foster competition and transparency throughout the financial sector. Mr. Gensler hoped this focus on transparency and competition would help both issuers and investors.

With regard to modernization, Mr. Gensler described the SEC’s history of adapting to emergent technologies and emphasized the need for more dynamic regulation. While acknowledging cryptocurrency as one area of technological advancement, Mr. Gensler focused on artificial intelligence and predictive data analytics as potentially revolutionary developments for the SEC to watch closely in the coming decade. He also pointed to non-technological developments, such as special-purpose acquisition companies and direct listings, as important areas for the SEC’s consideration.

Mr. Gensler addressed public speculation on the timeline of new SEC rules publication by focusing on flexibility and “getting proposals right” rather than trying to prioritize any one area over another.


Commissioner Gensler reports that in 1963, financial services accounted for 3.5% of the U.S. economy, while today it accounts for about 8%. He also cites to a 2014 study, which he describes as reporting that the “costs of financial intermediation . . . were as high in 2014 as they were in 1900.” The message behind these numbers is that financial services are too great a part of the economy with the implicit assumption that costs of financial services are effectively a tax or a drag on the U.S. economy. Mr. Gensler suggests that better (more?) dynamic regulation would serve to increase competition and drive down costs.

A different view on the role of financial services in the U.S. economy can be found on the U.S. government website, SelectUSA. According to that website, the financial services industry generated an export-import trade surplus of over $40 billion dollars and employed more than 6.3 million people. Further, the government site indicates that financial services also play a significant role in supporting the export of U.S. manufactured and agricultural products.

As to the costs of financial intermediation, without being able to access the 2014 article to which Mr. Gensler cites, it is common knowledge that the costs of trading U.S.-listed securities have dropped dramatically. New financial technologies, such as robo-advice and payment through the use of digital assets, may also substantially reduce the costs of financial transactions.

In short, a very high-level view of the numbers may not actually tell very much about the role that financial services should play in the economy, or as to whether that role is now too large, or could even be increased, given America’s position as banker to the world. While regulators should certainly be mindful of the costs of financial services and whether those costs are artificially high, it should be as important for regulators to be mindful of the costs and the impact of the regulations that they impose.

To take one example of the potential impact of regulatory costs, it is useful to take a look at another number: the number of futures commission merchants (“FCMs”) in the United States pre- and post-Dodd Frank. In January 2008, the CFTC shows that 151 firms filed financial reports as FCMs. In January 2021, the CFTC shows that 65 firms filed reports. This suggests some correlation between increasing regulation and a decrease in the number of competitor firms.

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Primary Sources

  1. SEC Chair Gary Gensler, Prepared Remarks: “Dynamic Regulation for a Dynamic Society” before the Exchequer Club of Washington, D.C.

CFS Monetary Measures for November 2021

Today we release CFS monetary and financial measures for November 2021. CFS Divisia M4, which is the broadest and most important measure of money, grew by 5.4% in November 2021 on a year-over-year basis versus 5.1% in October.

For Monetary and Financial Data Release Report:

For more information about the CFS Divisia indices and the data in Excel:

Bloomberg terminal users can access our monetary and financial statistics by any of the four options:

3) ECST –> ‘Monetary Sector’ –> ‘Money Supply’ –> Change Source in top right to ‘Center for Financial Stability’
4) ECST S US MONEY SUPPLY –> From source list on left, select ‘Center for Financial Stability’

SEC Proposes Amendments to Money Market Fund Rules

The SEC proposed amendments to the requirements applicable to money market funds pursuant to ICA Rule 2a-7 (“Money Market Funds”) under the Investment Company Act that are generally aimed at preventing a run on money market funds during a time of financial crisis. The amendments were proposed in light of the significant redemptions experienced by money market funds at the start of the COVID-19 pandemic.

Regulatory Changes
The proposed amendments include:

increasing the amount of assets with daily liquidity that a money market fund must hold from 10 percent to 25 percent of its assets; and increasing the amount of assets with weekly liquidity that a money market fund must hold from 30 percent of its assets to 50 percent; funds would be required to institute stress tests to determine their minimum level of desired liquidity; the SEC asks for comment as to what requirements should be imposed on a fund that fails to maintain its required liquidity level;

removing from the existing money market funds rule the authority of funds to impose either gates on redemption or to impose liquidity fees on redeeming investors (the SEC said that such authority was counterproductive encouraging investors to redeem before the gates or fees could be imposed);

requiring institutional prime and institutional tax-exempt money market funds to implement swing pricing, which would permit adjustments to current net asset value per share when the fund has net redemptions (and result in redeeming investors bearing liquidity costs);

modifying certain reporting requirements on Forms N-MFP and N-CR to improve the availability of money market fund information, and making conforming changes to Form N-1A to reflect proposed changes to the regulatory framework for these funds;

adding provisions to address how money market funds with stable net asset values should handle a negative interest rate environment;

adding provisions that specify how funds must calculate weighted average maturity and weighted average life; and

imposing additional reporting requirements on money market funds, including that a fund must file a report when it falls below a specified liquidity threshold.

Comments on the proposal are due within 45 days after its publication in the Federal Register.

Commissioner Statements
SEC Chair Gary Gensler supported the proposal, saying the reforms will help maintain “fair, orderly, and efficient markets.” SEC Commissioner Allison Herren Lee called the proposal a “necessary continuation of our focus on addressing weaknesses of these funds.” She added that, with respect to the public comment period, she would like to better understand the “foreseeable impacts of swing pricing” and how it might impact investor choice. SEC Commissioner Caroline A. Crenshaw stated that both the SEC and investors would be better positioned to “monitor funds’ activities and evaluate the impact of market stress on those funds.”

SEC Commissioner Hester M. Peirce opposed the proposal, saying that, as in the existing rule, there is “too much regulatory prescription and too little room for experimentation by funds.” Ms. Peirce said the proposal could “undermine the objective of making money market funds more resilient” and would “continue the trend of driving more money into government funds.” Ms. Peirce said, such an outcome would leave investors, issuers and markets worse off. Ms. Peirce was supportive of the reform to eliminate the connection between liquidity thresholds and fees and gates.

SEC Commissioner Elad L. Roisman supported some elements of the proposal, including the effort to explore several measures that could reduce run risk for money market funds. However, he dissented and expressed “strong reservations” about the requirement that a “uniform approach to charge fees to redeeming investors” would be applied to all institutional non-government money market funds (emphasis in original). Further, he found the timing of the comment period to be a “major shortcoming,” saying that he did not have confidence that market participants will be able to provide meaningful feedback over a comment period that aligns with several holidays and five other proposed rulemakings.


There may be no area in securities law that is so conceptually difficult to create sound regulation as with respect to money market funds.  The central question is: how does one create a fund that maintains a fixed share value of $1, notwithstanding fluctuation in the value of the fund’s asset, and yet avoid having investors redeem when they believe that the true value of the fund is less than $1?  So far, mission not accomplished.  

Given the difficulty of the problem, Commissioner Peirce’s suggestion that the SEC should be less prescriptive and let different funds approach the problem differently makes sense.  After all, as the SEC concedes, the regulatory imposition of gates did not work.  Perhaps the SEC would do better to let the market experiment with solutions.

Brace Yourself: Mass Inflation Warning

CFS Chairman of the Advisor Board William R. Rhodes was interviewed by Trish Regan of American Consequences. They discussed the dangers of inflation, and the need to tackle it rapidly so it doesn’t turn into a more serious problem of stagflation or hyperinflation as the US experienced in the late 70s and early 80s. Bill also points out that the inflation problem is not unique to the US; it is also a problem for the UK, continental Europe and other countries as well. He states that the time for action on reducing inflation and rising prices is now, before it becomes embedded in the expectation levels of the population.

Listen to the Interview Here.

FRB Governor Randal Quarles Offers Parting Thoughts

Commentary by Steven Lofchie

Former Vice Chair for Supervision Randal K. Quarles covered a broad range of topics in his farewell remarks. He celebrated the overall strength of the banking system and suggested areas where there is latitude for regulatory change or recalibration.

“But I did at the time, and still do, have concerns about the possible precedents that have been created by the novel [credit] facilities that we [the Federal Reserve] created [as a reaction to the pandemic].”

Federal Reserve Board Vice Chair for Supervision Randal K. Quarles

Read his remarks, Between the Hither and the Farther Shore: Thoughts on Unfinished Business.