A view from the Open Markets Desk
Review of Joseph Wang's *Central Banking 101*
Financial capitalism depends, to a great extent, on huge flows of money and securities that invisibly connect to our everyday market interactions. One enduring lesson of the 2008 crisis, I think, was that this financial plumbing matters: a household's monthly mortgage payment might, it turns out, be connected to an asset manager's portfolio, and insured with credit-default swaps, in such a way that a recession could arise out of arcane financial contracts.
Such a system cannot make sense to any of us without the observations and synthesis of those who have access to the day-to-day flows at the center of this vast plumbing system, where all of these flows intersect. Perhaps my favorite essay of Minsky's is his “Central Banking and Money Market Changes.” It was one of his very first publications out of grad school, in 1957. Minsky had spent some months as an observer at the New York brokerage Garvin, Bantel and Company, where among other things he observed the then-new Federal Funds market, where banks could make short-term loans of reserves to one another. From that period of detailed observation, Minsky extracted the beginnings of the theory for which he later became widely known. If you read it carefully, you can see that Minsky's willingness to sit and watch what was actually happening in the money markets, and then to write it down, gave him a perspective on finance that is hard to develop in any other way.
It is in this spirit that I read Joseph Wang's Central Banking 101 (2020): the author, as he tells us, spent five years working on the Open Markets Desk at the Federal Reserve Bank of New York, the branch of the US central bank that interacts most closely with financial markets. On the Desk, Wang was in a position to observe trillions of dollars' worth of flows go through the Fed's books.
Not only that, he went to the trouble of writing it down, and so anyone who is interested can get a compact snapshot of what the US central bank, the heart of a globalized and financialized economic system, is doing on a day-to-day basis. The book's basic layout (a set of chapters by institution, then a set of chapters by market) will be familiar to those who have worked with the US Financial Accounts (Z.1), or with Stigum's Money Market. Each of Wang's sections efficiently describes an institution or a market, telling us what it is and why it exists. Each section also offers a short mechanism, history or framework, told with narrative, graphs and T accounts, by which we can make sense of the thing. Two closing chapters offer a crash course in interpreting monetary policymaking.
For example, a section that stood out for me was Wang's discussion of secured money markets (pp. 122–135). This groups the repo market with the FX swap market. The former is a loan of dollars against Treasury collateral; the latter is a loan of dollars against a foreign-exchange deposit. Wang sees the FX swap as essentially a money-market transaction, a basic component of the market-based credit system. This clarified, for me, the Fed's recent shift from central bank liquidity swaps—FX swaps with foreign central banks—to the FIMA repo facility—dollar repo with foreign central banks: the transactions are comparable, but FIMA repo lets the Fed avoid non-USD collateral.
Thinking of Minsky, perhaps, I was looking in Wang's chapters for a theory. He does not particularly push for one, at least not in so many words. He does mention an orthodox economic theory of monetary policymaking, framed around a "neutral" interest rate, the level that prompts neither expansion nor contraction, and the Fed's trying to pin rates at that neutral level (p. 7). A comparable level of attention is given to Modern Monetary Theory (pp. 223–224). Trained as a lawyer and so perhaps inclined to skepticism, Wang does not seem to have much stake in either.
I think we can group Wang among the pragmatic observers of the institutions of the financial system, like Ralph Hawtrey, Robert McCauley, or legal scholar Katharina Pistor. Very much to his credit, Wang would rather tell us what is actually happening in financial markets, and how those working on the Desk think about it, than try to offer a master theory. He shares miniature economic models if and when they seem useful, and no more than that. The result is an accessible outline of a central banking perspective on today's monetary and financial system. I am happy to recommend it, and Wang's blog, to readers of Soon Parted.
I will read!