Sep 23, 2021Liked by Daniel H. Neilson


Expand full comment

A question I've wanted to ask since I first learned of the term "survival constraint" in Perry Mehrling's first run of the Economics of Money and Banking MOOC in 2012: what is the Fed's survival constraint? Where does the Fed get its liquidity to pay 5 basis points on Reverse Repo? Where does the Fed get the liquidity to buy unlimited amounts of financial assets from private firms?

Also, isn't contagion the key systemic risk with Evergrande, rather than the cascading microeconomic effects you focus on? If confidence channels undermine other Chinese developers, would that be like traders panicking in 2008 and selling off even rock-solid assets with no exposure to Lehman?

Is the latter contagion story unpalatable, because it strongly implies prices are arbitrary, as Fischer Black noted in "Noise" (which I was also introduced to in Mehrling's MOOC)?

Expand full comment

Fed's survival constraint is different from everyone else's: the central bank has to not lose its place at the center. At the core, for the Fed but also for systemic commercial banks, that is frequently a political-economic consideration; at the periphery it is more strictly financial.

I think that a contagion vector is not incompatible with the story I am telling here.

Expand full comment