Robert C. Hockett & Saule T. Omarova — The Finance Franchise

The dominant view of banks and other financial institutions is that they function primarily as intermediaries, managing flows of scarce funds from those who have accumulated them to those who have need of them and can pay for their use. This understanding pervades textbooks, scholarly writings, and policy discussions – yet it is fundamentally false as a description of how a modern financial system works. Finance today is no more primarily “intermediated” than it is pre-accumulated or scarce.

This Article challenges the outdated narrative of finance as intermediated scarce private capital and maps the basic structure and dynamics of the financial system as it actually operates. We begin by developing a three-part taxonomy of ways to model financial flows – what we call the “credit-intermediation,” “credit-multiplication,” and “credit-generation” models of finance. We show that only the last model captures the core dynamic of a complex modern financial system, and that the ultimate source of credit-generation in any such system is the sovereign public, acting primarily through its central bank and treasury. We then trace the operation of this dynamic throughout the financial system, from the banking sector, through the capital and “shadow banking” markets, all the way out to the “disruptive” frontier of peer-to-peer digital finance.

What emerges from this retracing of the financial system’s operative logic is a comprehensive view of modern finance as a public-private franchise arrangement. On this view, the sovereign public acts effectively as franchisor, licensing private financial institutions to earn rents as franchisees in dispensing a vital public resource: the public’s monetized full faith and credit. We conclude the Article by drawing out some of the potentially transformative analytic and normative implications of a paradigmatic shift from the orthodox theory of financial intermediation to the franchise view of finance.

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Cornell Law Review
The Finance Franchise
Robert C. Hockett & Saule T. Omarova

Jomo Kwame Sundaram — Why International Financial Crises?

Raises some good questions. 

The leading international monetary economist of the post-war period, Robert Triffin, described the post-1971 arrangements as amounting to a “non-system.” Now, with the international monetary system essentially the cumulative outcome of various, sometimes contradictory and ad hoc responses to new challenges, the need for coordination is all the more urgent.

Makes a case for more concerted action now that the world is operating under a "non-system." 

I would not call it a non-system but a highly flexible system that resist simple analysis. 

The gold standard for international settlement resulted in a system that was simpler to model, but it was much more brittle, which is a reason it broke down.

TripleCrisis
Why International Financial Crises?
Jomo Kwame Sundaram

Eric Schliesser — When the Financial Insiders tell you the accounting numbers are (ahhh) made out of thin air

Parsing Emilios Avgouleas and Charles Goodhart on the noble lie about finance and accounting.

Fourth, the reason why they think it's problematic that "published accounting valuations" are not stable is not because, say, all risk models are, thereby, based on epistemic mirages, but, rather, what needs to be prevented is that "the general public" starts the doubt the integrity of published valuations. That is to say, the public needs to stay in the dark about the truth about these numbers (because if the public loses confidence we risk more extensive crises). If keeping the shoddiness of accounting secret from the public serves the public's genuine good, one may call this a a species of Platonic noble lies. But other terms also spring to mind.

Digressions&Impressions
When the Financial Insiders tell you the accounting numbers are (ahhh) made out of thin air
Eric Schliesser | Professor of Political Science, University of Amsterdam’s (UvA) Faculty of Social and Behavioural Sciences

Brian Romanchuk — Are Banks Special? Yes And No.

Brian provides an excellent summary of the financial system and the role of banks in it.

Whether banks are "special" is a fundamental theoretical question, and what side economists are on does not seem to be driven by politics or the mainstream/heterodox divide. The fact that the answer is somewhat ambiguous allows this division to remain.

I will discuss the implications in later articles. But it is clear that reforms need to take into account the fact that the formal banking system is not particularly special in terms of its role during an expansion. Aggressive regulation of the banking system, such as a 100% reserve requirement, would just drive activity into the shadow banking activities undertaken by both financial and "nonfinancial" firms. Such an outcome would probably make the inevitable future financial crises even worse.

 Bond Economics
Are Banks Special? Yes And No.
Brian Romanchuk

Felix Salmon — The payments impasse

I’ll say this for bitcoin: it’s got a whole new class of people, like Matt Levine and Guan Yang, increasingly interested in one of my longstanding obsessions — payments. (You might be surprised to learn how hard it is to get people interested in payments.) Guan’s post, along with the response to it from Simple’s Shamir Karkal, provide a techie’s viewpoint into a question which many non-Americans have when they start living in this country: how on earth can can moving money from one person to another be so difficult, expensive, and time-consuming?

The simple answer, as Karkal hints at, is that we’re suffering from a particularly toxic combination: an outdated payments system combined with a seemingly powerless central bank, which is happy to let the big banks dictate the pace of change (or lack thereof). And as American Banker’s Kevin Wack explained in a great piece last November, the big banks are very good at vetoing even incremental improvements in the US payments infrastructure.

Econoblog
The payments impasse
Felix Salmon