I want to, just at this moment, talk about the big picture of the course. There's three big picture points I want to make, okay. One is that I, why do I know something about money, okay. My expertise as an academic, as a professor, I have never traded the money markets. People always say they think I'm a refugee from Wall Street or something, not, well maybe I am, but I've never actually been in Wall Street, okay? So, all the learning I have is book learning, okay. But it's book learning from books like Stigum and the Financial Times. Not academic journals, mostly. The academic stuff that I've read is in the history of modern economics and the history of financial economics. These two books on the top here, The Money Interest and The Public Interest, this is a history of American monetary thought. Fisher Black and The Revolutionary Idea of Finance, this is a history of the rise of modern finance. So, these are the intellectual foundations with which I am approaching this subject of monetary economics. And a number of the readings that we are going to have are from that, that's why we're reading Alan Young, big hero of mine. That's why we're reading Bagehot. We might be reading Hawtry, Shaw. These are names that probably you haven't heard of, okay, but you will. You will learn about them, and I think grow to respect them and love them as I do, that's the intellectual foundation. But I wantna really emphasize to you, this is not a course in ancient ideas, it's not a course in history of economic thought. I do that, I write books about that, but this is very much a course about the present. Okay, it is using that history, using that intellectual frame to talk about the world as we live in it now, okay. And the big thing that we're trying to figure out, everyone's trying to figure out, is financial globalization. Or global financialization, sometimes people say. What I've learned from reading the history of monetary thought, the history of financial thought, is that every generation has to figure out the world in front of them. The world is changing, this is a system that is not constant. There are some ideas that we can bring from the past, that we can bring from people who have figured this out for their own time. But we have to figure it out for our own time. There are new features to the system today. It works differently. There are some eternal varieties, hopefully. It's not as if all the laws of economics have been repealed. But it is a strange new world. And as I'll say later on in this lecture, much of the money and banking textbooks that are around, I don't use, okay. And the reason is because these textbooks have evolved from 1950, and they haven't changed enough, okay. In 1950, banking was a certain thing, okay, and it has just unrecognizably changed since then. And so, I'm of the opinion that what we should do, let's say, those with great textbooks, let's just put them in the library, and let's start again, okay? Start again with something that's talking about the real world. And that means that it's a little looser, okay, but it means that it's attached to reality and that's the virtue, okay. So that's the second point. This course is trying to be attached to reality, but using as our intellectual base, this historical approach. The third thing I want to say, big picture, is that being attached to reality means listening to the bankers. Okay, it means listening to them and trying to figure out what their world is like. They don't have a big picture. Most of the practitioners, they know their little piece of it. They're experts in repo, they're experts in Euro dollar, they're experts in all these little arcane things and they will tell you they're happy to let you buy them drinks forever and explain the arcana of this. But they have no sense of how the system as a whole works, okay. So, it really is true, that an academic can bring value here by noticing patterns, noticing this one is connected to that one. So this is what I'm trying to do in my life, with my own intellectual resources, is try out to figure the world. And I'm trying to use this course for that purpose as well, that we're going to be talking about that together. And it's not so easy, listening to the bankers. We're used to courses where all you really need to know is how to take a first derivative and set it equal to zero, okay. And that's not going to help you here, we're not going to do any of that, actually, in this course. This is Marcia Stigum, The Money Markets, classic investment text. All these books by the way are at the Columbia Bookstore and they should all be on reserved in the business library, which I chose because they've got lots of copies of this already, which they use for their classes. This is a desk reference that is used by people who trade the money markets. It's a little bit out of date. They've updated it, the fourth edition. They've added a chapter on Euro dollars. But it is the best thing there is. And it's the bible of the money market. When I first started teaching, money and banking, I don't know, ten some years ago, this was the entire text and we read through it. There were no lecture notes. So you have it easy. [LAUGH] By comparison to the guinea pigs, okay, who were ten years ago. I would encourage you to, and you'll see on the syllabus that I indicate particular chapters of Stigum that go with particular lectures. I think it's very helpful to read these chapters, but I want to give you a sense of the spirit in which you want to read them, okay. Think of yourself as an anthropologist reading the sacred text of some tribe, maybe primitive tribe, okay? And trying to figure them out, how they think about the world and so forth. Okay, I'm not trying to teach you to trade the money markets, not at all. But we are trying to understand this world that's rather arcane, rather special. And the people who live in that world are interviewed in here, okay? So this is our sort of window into the operations of this strange tribe. That's how I want you to use this book. And that can be fun. If you try to read it to understand all the little pieces, it can blow your mind. And if you had to trade money, you would be very focused on this, and all of that. But if you're not trading money, it can be kind of arcane. So read it like that. It's a sacred text of a foreign tribe. I've also just brought a copy, and they are here if you want to sell them. This is a copy of my book, New Lombard Street, which is about the crisis, but its also about the history of the fed for a hundred years. Two of these chapters are assigned, and they're just scanned in. So you don't have to buy this book if you don't want to. But I put some of them on, I had the bookstore collect some of them just in case you wanted to. Because it might be an insight into what the course is about. But it's not required reading. What else? I almost forgot. We have here The Financial Times. In some sense, what this course all about is teaching you to read The Financial Times. So that you can read it and translate it into English. And in fact there will be an exercise in doing exactly that on the final exam. An article that you will translate into English for your roommate. And you will see everyday, not today, but everyday otherwise, I will begin lecture by doing exactly that for you, reading some article in that day's Financial Times and explaining it to you. This is the sacred text I would say, the ongoing sacred text of the money tribe, The Financial Times. And everything I know really, that I've learned about modern money markets, I've pretty much learned from The Financial Times, or they pointed me in the right direction. So if you can learn to read The Financial Times, you don't need me anymore, okay? You're going to be fine. One thing I would note, just to give you an example on the kind of thing we're going to be talking about. Here on page two, are a bunch of articles about Euro crisis. German banks split over ECB role. The idea that the European Central Bank, maybe should be buying the debt of Spain or Italy in order to support the prices of those debts. And this is a huge controversy. What is this controversy about? What do they even mean? What does it mean for a central bank to be buying the debt of Spain and Italy? This is what we would be talking about, all eyes and ears on Dragi over Bon proposals. So, that's about that too. So often this page two has some money articles. Also the last page of the second section, in fact today's there's just incredible number of fantastic articles that are illustrations. Chinese steal mills brace for slowdown in demand. You wouldn't think there was a monetary angle to this. But it turns out that in fact in China, the inventories of iron ore have been used as collateral for borrowing by businesses. And the banks are calling in these loans, and as a consequence they're dumping their collateral and you're having the beginning of a financial crisis there being caused by this. And so this is a thing that we'll come to understand by the end of the course. FourX brokers back EBS plans to reign in predatory prices. It doesn't even sound like English, okay? This is about high-frequency trading. These people who basically, they're not people, they're computers, cyborgs, okay, algorithmic traders. Who are trading infinitesimal billionth second stuff. And the normal dealers, human beings, okay, and banks are getting mad at them because they're making money at their expense. And so there's this battle going on in the dealer world between the cyborgs and the human beings. And we'll learn about that. Yes? >> I took a class in econ history. >> Yes. >> And I found out in economics, they disagree with each other a lot. So are you a believer of any economics school? >> Well, okay, so the question is, how do I locate myself in the dispute between economists? And I don't know exactly which schools you mean, but maybe saltwater and freshwater, sometimes people say, or monetarist and keynesians or something like that. What I certainly identify myself with, is the money view. But this is a word I invented. So, it's my own school. But I definitely identify myself with this line of thinking that I was mentioning. Let me just give you some of those names, because you'll hear them again. So, let me just erase this here and, There's sort of two lines of thinking that I very much, when I say, what school am I? I feel like I have intellectual ancestors, okay, that I respect and that I try to build on. So that's the best answer to your question. And one set of these are Americans. Okay, and they start with Allan Young. Because central banking started then, and he starts to think about that. There is no tradition of central banking thinking, and then we get a central bank and we have to start developing it. And so there's Young, Alvin Hanson, this is my first book was about Young, Alvin Hanson, and Edward Shaw. Three generations of thinking about monetary economics. And I would add a next one, Minsky. Jaime Minsky, in a tradition. You might have heard of Jaime Minsky, some people call this financial crisis a Minsky moment. I think the second reading, for the second week, is going to be about Minsky. It's an article I wrote about Minsky, which I think of as the missing chapters at the end of my first book. Okay, that if you were to continue on the story, it would have gone to Minsky. So I think of myself in this line, okay. But there's another line that I'm very much, I haven't written as much about it, but there's the whole sort of the UK tradition. Because the UK has a very old tradition of thinking about central banking. Because they had a central bank for a long time and they were the center of the world economy for a long time. So you can learn a lot from reading this old literature. And one of those people is Bagehot. Another one is Hawtrey. Another one is Ralph Sayers, who taught at the LSE. So these are generations, again we're going down. And another one is Charles Goodhart, who's alive today. Okay, I think of this as a tradition of central banking thinking. Almost all these people are talking to bankers. They're talking to central bankers. They're not necessarily academics at all. Charles Goodhart was an economic historian, as a matter of fact, and then he eventually he was teaching at the LSE, but he was the Chief Economist of the Bank of England for a long time. That was what he did with most of his career. Sayers taught at the LSE, but if you know England, it's very small. To teach at the LSE means you're a mile away from the city, okay? It's like teaching in Manhattan, you're a mile away from Wall Street. So you're drinking this milk everyday on the subway or in the taxi. You're living in the middle of the world money markets. And so I've learned a great deal from this world. I would say that some of these people called themselves Keynesian's. Certainly Hanson identified with Keynes. Minsky did in a certain way as well. Some of them were more thought of themselves as monetarists. Shaw short of emphasized some of that, as a matter of fact. Some people think of Hawtrey as a kind of a monetarist. I think I see them all as being a continuous stream of intellectual development that is keeping its eye on the real world, on the situation that they're living in right now. And trying to figure it out, trying to abstract from it and see. So these are my heroes. This is where I come out. I did learn a lot of finance, I learned Fisher Black, but finance thinks that there's no such field as monetary economics. That it should be financed instead of money. And that in efficient market, there's no liquidity problem. All prices, if all prices are exactly at their efficient market's price. There's nothing for liquidity to distort. The story I was telling about a bank having to have a fire sale on its loans, there's no such thing as a fire sale in straight ahead finance. Because if you just move the price just a tiny bit below its true value, somebody will snatch it up. So prices aren't ever, there's not runs on banks and so forth, that's the pure finance line and I learned the pure finance line. I wrote a whole biography of Fischer Black in order to take on that most challenging point of view to this tradition. This tradition here, which I had already identified with. And so I jump to the other side of the street. And I said okay, the biggest challenge to this point of view, are people who think there should be no central bank, there's no reason for them. Okay, obviously that's a pretty big challenge okay? So let me get inside that mind and understand that, and then let me step out, and right through this course and say okay, what is my answer to Fisher? What would I say to him if he were here? And what I would say to him is what I'm going to say to you. That's what this course is about. This course is really, in my mind, a dialog between the classic central banking perspective here, okay, and the modern finance perspective. And we're trying to get those two ideas which seem so contradictory, to rub up against each other and create sparks for some new economic thinking, which is this course, that's where I am. You're not going to hear me talk about Keynesians versus monetarists, that's really not where I'm coming from at all. But there is a dialogue, there are oppositions that are creating this, but they're not the oppositions you're used to. It's the opposition of modern finance, and classic central banking thinking. That's what I'm all about. I'm glad you asked that question. Did you get a good answer? Do you want a followup at all? >> Yeah, I just wanted to be sure what kind of idea, or do you have for the class. >> For which. >> I mean, yeah. I asked the question just to figure out what kind of idea you're going to like talk about in the class. >> Okay, so she's pushing me further. Okay, so where do you stand, she asks, okay? So, where I ultimately do stand, and I will defend this position for the rest of the class, is that I do think that there is a role for central banks in creating bounds on the system, that it is a version of the role that Bagehot had in mind in 1873. Remember I said lend freely at a high rate against good security? That doesn't quite work in the modern world, but there's a version. I subtitled my book, How the Fed Became the Dealer of Last Resort. This is a signal that what I'm trying to say is we need to update Bagehot for the present, okay. That we do need central banks, that finance is wrong when they say that central banks are just in positions of the state on perfectly functioning financial markets. I don't think financial markets work perfectly. I think they run into problems, and banking is all about that, and there are particularly these liquidity problems. It's not asymmetric information so much, you're not going to hear that from me, okay. It's all going to be about these particular monetary problems. Now, I worry that the central bankers who are running the world right now are running it a bit blind. And I think, the things I read that I find really compelling, mostly come out of the Bank of England, again because of this long tradition of central banking. Or The Bank for International Settlements which is sort of the banker's bank for the world. And not so much out of academic economic publications which are fighting old battles and having grabbed onto this new world.