Odd Lots Younger and Menand Explain How We Got the Modern Banking System
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Dec 15, 2022 Josh Younger is a research partner focused on the origins of modern banking, while Lev Menand is a Columbia law professor and author probing the Federal Reserve's evolution. They discuss the historical development of modern banking, including the rise of shadow banking and the repo market. The pair also examine the Federal Reserve's complex influence in economic management and the persistent vulnerabilities within the financial system. The insights into digital currencies and regulatory challenges further underscore the need for reevaluating banking practices and ensuring financial stability.
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Birth of Shadow Banking
- William Martin consciously reshaped the financial system, enabling non-bank entities like broker-dealers to mimic bank functions.
- This led to the rise of shadow banking, where non-bank entities provide money-like financing outside traditional regulations.
Benefits of Shadow Banking
- Shadow banking offers benefits like increased market liquidity and lower transaction costs, particularly in the Treasury market.
- It allows for greater elasticity, providing new money during shocks like the one in 2020.
Eurodollars and Stablecoins: Parallel Origins
- The Eurodollar market originated from communist efforts to evade U.S. asset freezes, starting small and growing with specific applications like cross-border arbitrage.
- This mirrors the trajectory of stablecoins, which began with a narrow use case and raise questions about future growth and regulation.
