Maybe Destabilizing the Overnight Lending Market Would Be a Good Thing

Fight disinformation: Sign up for the free Mother Jones Daily newsletter and follow the news that matters.


Stephen Williamson has a long post up today questioning the wisdom of having the Fed adopt NGDP targeting, someting that enjoyed a boomlet of blogosphere chatter a few months ago. Most of the post is above my pay grade, but something he said piqued my interest in a different subject. NGDP targeting, says Williamson, could produce instability in the overnight lending market:

I think there are benefits to financial market participants in having a predictable overnight interest rate, though I don’t think anyone has written down a rigorous rationale for that view. Who knows what would happen in overnight markets if the Fed attempted to peg the price of NGDP futures rather than the overnight fed funds rate? I don’t have any idea.

Tyler Cowen is more sanguine: “I believe overnight financial markets could adjust to a variety of reasonable regimes, and indeed the evidence across nations appears to confirm this.” But I have a different question: why should we care? The modern financial system is heavily reliant on overnight lending, and it’s the backbone of the shadow banking system. In 2008, the shadow banking system largely imploded, and a big part of the reason was its heavy reliance on ultra-short-term lending, which can be turned on and off almost instantly. When panic spread, the overnight spigot was turned off, and banks started to collapse. This was a major cause of the financial collapse and the resulting recession, and it’s the reason that the Basel III rules adopted a couple of years ago required banks to rely more on stable, long-term funding.

Nonetheless, the shadow banking system, and its overnight lending backbone, is still enormous. And although I suppose we’ve gone way too far down this path to turn back now, I have to wonder just what, on a systemic level, we gain from having our financial system so dependent on overnight lending? Even if the overnight market didn’t adjust well to NGDP targeting, and therefore shrunk, would that be an altogether bad thing?

TIME IS RUNNING OUT!

We have an ambitious $350,000 online fundraising goal this month and it's truly crunch time: About 15 percent of our yearly online giving usually comes in during the final week of the year, and in "No Cute Headlines or Manipulative BS," we explain why we simply can't afford to come up short right now.

The bottom line: Corporations and powerful people with deep pockets will never sustain the type of journalism Mother Jones exists to do. And advertising or profit-driven ownership groups will never make time-intensive, in-depth reporting viable.

That's why donations big and small make up 74 percent of our budget this year. There is no backup to keep us going, no alternate revenue source, no secret benefactor. If readers don’t donate, we won’t be here. It's that simple.

And if you can help us out with a donation right now, all online gifts will be matched thanks to an incredibly generous matching gift pledge.

payment methods

TIME IS RUNNING OUT!

We have an ambitious $350,000 online fundraising goal this month and it's truly crunch time: About 15 percent of our yearly online giving usually comes in during the final week of the year, and in "No Cute Headlines or Manipulative BS," we explain why we simply can't afford to come up short right now.

The bottom line: Corporations and powerful people with deep pockets will never sustain the type of journalism Mother Jones exists to do. And advertising or profit-driven ownership groups will never make time-intensive, in-depth reporting viable.

That's why donations big and small make up 74 percent of our budget this year. There is no backup to keep us going, no alternate revenue source, no secret benefactor. If readers don’t donate, we won’t be here. It's that simple.

And if you can help us out with a donation right now, all online gifts will be matched thanks to an incredibly generous matching gift pledge.

payment methods

We Recommend

Latest

Sign up for our free newsletter

Subscribe to the Mother Jones Daily to have our top stories delivered directly to your inbox.

Get our award-winning magazine

Save big on a full year of investigations, ideas, and insights.

Subscribe

Support our journalism

Help Mother Jones' reporters dig deep with a tax-deductible donation.

Donate