Perry Mehrling Explains Why "The Money View" Is Key To Understanding Financial Markets

Tracy Alloway (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:15)

And I'm Joe Weisenthal.

Tracy Alloway (0:17)

Joe, we like to talk about money on this show, don't we?

Joe Weisenthal (0:20)

We sure do. Both sort of things that are implicitly about money, which is everything, and then also explicitly about money, which is what is it, where does it come from, what are some different theories of how it exists.

Definitely, I would say it's one of our favorite topics.

Tracy Alloway (0:38)

Yeah, and we also like to talk about the repo market.

And one other thing we like to talk about is the inadequacies of traditional economic models. So what if we were going to talk about all three of those in one big episode?

Joe Weisenthal (0:55)

Oh, I like that, like a true trifecta. Like we had a recent episode on the repo market with Holt and Poser, that was great. We had, we talked to Lord Skidelsky recently on the failure of traditional, in traditional economists to understand money. And as you mentioned, we talk about money all the time.

So I agree with that. If we could sort of combine all of these themes, economist failures, money, repo, all these things, that would be a very satisfying discussion.

Tracy Alloway (1:28)

All right, well, I have a feeling you're in for a satisfying discussion because our guest today is funny that you should mention Holt and Poser, but it's someone who has worked with Zoltan in the past, someone who Zoltan actually quoted when he did that episode of Odd Lots back in November, and someone who Zoltan says has informed his thinking on the repo market. And the reason we're sort of focused on the repo market particularly, and it's gonna become clear as we embark on this conversation, but there was this moment during the big repo madness in September where even though we had repo rates shoot up to 10%, we didn't see market participants come in and actually take advantage of that rate and actually arbitrage it out. And this was one of the big questions of that event. Like why didn't JP Morgan come in and earn 10% overnight in September in the repo market?

Joe Weisenthal (2:33)

Right, that whole incident, so we got through the year without another major hiccup. Obviously the Fed sort of realized that things were problematic, that there was a shortage of liquidity and so on. And so they took a number of steps basically in the final quarter of 2019 to prevent another blowup like we saw in early September.

But that doesn't take away from the fact that that incident in early September when repo rates soared raised a whole host of new questions about the current structure of a sort of bank liquidity system and whether it's adequate and whether people really understand it well. So even in the absence of another blowup, there's still just tons of discussion about what really needs to be done to address flaws in the plumbing of the system.

Tracy Alloway (3:22)

That's exactly right. And we're going to be looking at that particular repo example through the prism of money and also an economic model that takes into account a sort of new definition of money. So without further ado, why don't I bring on our guest? I'm very excited. It's Perry Mehrling, the Professor of International Political Economy at the Pardee School of Global Studies at Boston University. Perry, thanks for coming on.

Perry Mehrling (3:51)

Nice to be here.

Tracy Alloway (3:53)

So you can tell Joe and I are both excited to talk with you and we have a lot to get through. But maybe just to begin with, you walk us through your definition of what money actually is and how your, you call it the money view. How does that differ from a traditional economic model?

Perry Mehrling (4:16)

Well, the money view is an approach to thinking about economic interactions that emphasizes when you say it's a different view of money, it treats money, the essential quality of money is that it's a means of settlement, a means of payment of settling bills.

That most of the economy is organized as an interlocking set of balance sheets, promises to pay. And what you're promising to pay is money. So the settlement constraint is the essential constraint on the economy as a whole that keeps it sort of coherent, that people are focusing their minds on how we're gonna actually satisfy that promise that I've made. And so clearing and settlement becomes very central. Now, you mentioned in the intro that that's something that is not really central in standard economics. Standard economics is thinking about intertemporal budget constraints and essentially a wealth constraint that if you have wealth, then you can convert that wealth into consumption or investment or whatever. And it pretty much assumes an economy of infinite liquidity that you can convert from one form of wealth to another form of wealth with no problem at all. Now, that's a useful abstraction for some purposes, but if what you're interested in is money, it's not a useful thing. It's abstracting from money essentially and looking behind the veil of money. The money view says, let's look at the veil of money. The veil of money is the essence of what's happening in the economy, not something that's obscuring what's happening at some deeper level.