Levy Thesis -- OValchyshen FINAL

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    Evolution of US-Dollar-Centric International Money Markets and Pro-Cyclicality of Basel III Liquidity Framework Submitted to Levy Economics Institute of Bard College  by Oleksandr Valchyshen   Annandale‐on‐Hudson, New York May 2019 Acknowledgements:  I have been inspired by the work of my thesis advisor, Professor Randall Wray, and Levy MS Program Director Professor Jan Kregel, and I trust that I have adequately incorporated thei r ideas into my own research. Further, I acknowledge that I am “standing on the shoulders of giants” of the Levy Economics Institute, and the education it has afforded me. I very much thank Professors Wray and Kregel for their valuable advice, and careful guidance through the process of writing this thesis.  The Levy Economics Institute  of Bard College May 30, 2019 2 PLAGIARISM STATEMENT Except where indicated, I have written this thesis using my own words and ideas. I have subsequently attributed each word, idea, figure, and table that is not mine to their respective authors. I am aware that paraphrasing is plagiarism unless the source is duly acknowledged. I understand that the incorporation of material from other works without acknowledgment will be treated as plagiarism. I have read and understand the Levy Economics Institute of Bard College statement on plagiarism and academic honesty as well as the relevant pages in the Student Handbook.  __________________________________ __________________ Your name and signature Date  The Levy Economics Institute  of Bard College May 30, 2019 3 Abstract:  This thesis presents research on the evolution of the US-dollar-centric international money markets. The timeline starts from late nineteenth century US, where the New York call money market already featured a number of sophisticated techniques such as margin investing, over-certification, and re-hypothecation.  Next, I explore the evolution of the market leading up to and after the Great Depression, through the regulatory period of the New Deal, and functional finance of the late 1930s and greater part of the 1940s. In the postwar period  , I highlight the Federal Reserve’s push for free markets, the sudden rise of the euro-dollar market in the second half of the twentieth century  —Minsky’s mone y-manager capitalism  —  and the Global Financial Crisis. Through all periods, markets evolved based on their  prime directive: to make money. The c oncept of “shiftability , ”  which was introduced before the Great Depression, is now being rejected as financial institutions engage in creation and destruction of money given that their liabilities serve as money for other economic entities, and securities and bank loans are linked.  Not only do loans create deposits, they also create private-sector securities. The regulatory framework of Basel III focuses on liquidity, which is implicitly based upon the global-liquidity concept. However, as I examine in this report, the Basel III liquidity framework neglects the contribution of the government sector, and its role in stabilizing the financial system. Instead, Basel III relies on the ability of the central bank and private sector to self-regulate through ratio-based constraints so that negative setbacks arising from the endogenous character of private liquidity, meaning debt deflations, are avoided. However, Basel III failed to recognize that the (i) money hierarchy is multi-tiered, and (ii) liquidity preference has a role in asset-price changes. Given these shortcomings, the Basel III liquidity framework does not contribute to counter-cyclicality, rather it extended the existing pro-cyclicality bias of international financial regulation.  The Levy Economics Institute  of Bard College May 30, 2019 4 Keywords:  hierarchy of money, liquidity preference, endogenous money, Modern Money Theory, money-manager capitalism, collateral-based finance, US dollar money markets, international money market, Eurodollars, New York call money market, impersonal money market, innovations, bankers acceptances, dollar acceptances, over-certification, re-hypothecation, repurchase agreements, repos. JEL Classifications:  E12, E44, E58, F33, F34, F53, F62, G01, G15, G21, G23, G24, H63

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Sep 10, 2019
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