Odd Lots Josh Younger on the Origin Story of the Shadow Banking System
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Nov 7, 2022 Josh Younger, JPMorgan's global head of asset and liability management research, explores the shadows of financial history. He dives into the pivotal year of 1953, revealing its surprising parallels to today's economic turbulence. Younger discusses how early decisions shaped the repo market and the enduring impacts these have on current bond stability. The conversation examines the Federal Reserve's strategies in navigating post-war economics and the evolution of a complex shadow banking system that still influences modern finance.
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1953 and the Fed
- In 1953, the Fed faced a crucial decision regarding its control of the bond market.
- Their wartime yield curve control, pegging yields to finance deficits, created challenges.
Debt Monetization and Inflation
- Monetizing debt by having the Fed buy bonds creates new money, potentially fueling inflation.
- Commercial banks also played a role in price fixing and money creation during World War II.
The Fed-Treasury Accord
- The Fed and Treasury reached an accord in 1951 to stop monetizing debt, but execution proved challenging.
- Political pressure and the Korean War complicated the transition to a free bond market.