How A New Type Of Money Helped Cause The Great Financial Crisis

Episode Summary

Executive Summary: The episode centers on Jacob Goldstein’s book about money as a social invention and uses it to trace how “moneyness” emerges, expands, and sometimes collapses. The hosts focus especially on shadow banking, money market funds, and how the 2008 crisis and March 2020 showed that assets only function as money when people trust them to be redeemable at par on demand.

Main Topics: Money as a social construct (Priority: 5/5): Goldstein argues money is not a fixed thing but a changing social arrangement built on trust, with blurry boundaries between money and non-money assets. Origin stories and the history of money (Priority: 4/5): The book is framed as a series of discrete origin stories rather than one continuous history, from barter myths to the gold standard and modern finance. Productivity and ‘more money’ for everyone (Priority: 4/5): The conversation uses Nordhaus’s lighting example to show that economic growth can make everyone better off rather than just redistribute a fixed pie. Shadow banking and money market mutual funds (Priority: 5/5): The episode explains how money market funds were created to mimic checking accounts, then evolved into a parallel banking system that created fragile money-like claims. The 2008 financial crisis as a run on shadow money (Priority: 5/5): The hosts emphasize that the crisis was not just subprime lending but also a bank run on repo, commercial paper, and money market funds when collateral was no longer trusted. Regulation, bailouts, and unresolved vulnerabilities (Priority: 4/5): They discuss post-crisis reforms, remaining fixed-NAV money funds, and the risk that government backstops continue to encourage money-like treatment of private claims. Broader questions about future ‘money-like’ assets (Priority: 3/5): The discussion extends to whether stocks, treasuries, or other assets may increasingly be treated as quasi-money and how that could shape future policy responses.

Key Arguments: Money works because people accept claims as redeemable at par on demand; once that belief breaks, the asset stops functioning as money. There is no timeless definition of money; like music or love, it emerges in different forms across history and contexts. Economic growth and productivity can increase everyone’s real purchasing power, so money is not inherently zero-sum. Shadow banking recreated the core banking process of transforming risky assets into perceived safe money outside the regulated banking perimeter. The 2008 crisis was also a collateral/run problem in repo and commercial paper markets, not only a subprime mortgage collapse. Government intervention repeatedly restores moneyness during crises, which stabilizes the system but may also reinforce expectations of rescue. Even today, parts of the financial system still rely on money-like treatment of assets that are not truly risk-free.

Data Points: Length of Stock Movers reports: five minutes or less - Promotional intro for Bloomberg’s Stock Movers report. Book length: less than 300 pages - Goldstein describes the book as a series of origin stories rather than a full continuous history. Ancient Babylon light output: 10 minutes of light per day’s wages - Bill Nordhaus example used to illustrate long-run productivity gains. Modern light output: thousands and thousands of hours - By the end of the 20th century, a day’s labor could buy vastly more artificial light. Depression-era bank regulation: Deposits insured; checking interest prohibited; savings interest capped - Regulatory backdrop for the creation of money market mutual funds. Money market fund target value: $1 per share - Reserve fund and other money market funds aimed to mimic bank deposits by maintaining a stable value. Crisis timing: 2007 - Paul McCulley’s ‘shadow banking’ framing and the onset of runs in repo and asset-backed commercial paper. Lehman exposure in reserve fund: About 1% of assets - Illustrates how even a small hit to a money-like instrument can trigger a major loss of confidence. Post-crisis rule change: Prime institutional money market funds no longer have a fixed $1 NAV - One major regulatory response after the financial crisis.

Pivotal Quotes: "“redeemable at par on demand”" — Jacob Goldstein: Used as the core definition of what makes an asset function like money. "“the whole point is to bore you into a sound night’s sleep”" — Bruce Bent (quoted by Goldstein): Describes the intended bland safety of the original money market fund. "“Everybody can have more money.”" — Jacob Goldstein: Explains the idea that productivity growth can expand the economic pie rather than merely redistribute it.

Implications: The episode suggests that financial stability depends less on labels than on trust in safe, liquid, par claims. If that trust shifts, crises can spread quickly. Regulators may keep backstopping quasi-money, but that also leaves the system vulnerable to the next run.