1 Harv. Bus. L. Rev. 75 (2011)
Regulating Money Creation after the Crisis

handle is hein.journals/hbusrew1 and id is 89 raw text is: REGULATING MONEY CREATION
AFTER THE CRISIS
MORGAN RICKS*
Like bank deposits, money market instruments function in important ways as
money. Yet our financial regulatory regime does not take this proposition seri-
ously. The (non-government) issuers of money market instruments-almost all of
which are financial firms, not commercial or industrial ones-perform an inval-
uable economic function. Like depository banks, they channel economic agents'
transaction reserves into the capital markets. These firms thereby reduce bor-
rowing costs and expand credit availability. However, this activity- maturity
transformation -presents a problem. When these issuers default on their
money market obligations, they generate adverse monetary consequences. This
circumstance amounts to a market failure, creating a prima facie case for gov-
ernment intervention. This Article evaluates policy alternatives in this area. It
finds reasons to favor establishing money creation as a sovereign responsibility
by means of a public-private partnership system-in effect, recognizing money
creation as a public good. (This is just what modern bank regulation has done
for decades.) Logically, this approach would entail disallowing access to money
market financing by firms not meeting the applicable regulatory criteria-just
as firms not licensed as banks are legally prohibited from issuing deposit liabili-
ties. Against this backdrop, the Article reviews the Dodd-Frank Act's approach
to regulating money creation. It finds reasons to doubt that the new law will be
conducive to stable conditions in the money market.
TABLE OF CONTENTS
INTRODUCTION   ................................................        76
O VERVIEW    ..................................................        82
I. TAKING THE MONEY MARKET SERIOUSLY ..................               84
A. Prelude: Shadow Banking and the Panic of 2008 ....            84
B. What's Different About the Money Market? ............           89
C. The Economic Value of Maturity Transformation .......           97
II. MARKET FAILURE AND THE CASE FOR GOVERNMENT
INTERVENTION   ...........................................        103
A.   The Trouble with Money-Claim Defaults ...............        103
B. Collective Action and Market Failure .................         109
C. Policy Alternatives (and a Brief History of U.S. Bank
R egulation)  .........................................      114
III. WHAT THE DODD-FRANK ACT MEANS FOR THE MONEY
M ARKET   ................................................        122
A. The Mechanics of Orderly Liquidation ..............          122
B. The Government's Refashioned Emergency Powers.....             129
C. The Ghost of Crisis Yet to Come ......................         136
IV .  CONCLUSION   ..............................................      140
* Visiting Assistant Professor, Harvard Law School. Through June 2010, the author was a
Senior Policy Advisor and Financial Restructuring Expert at the U.S. Treasury Department.
The views expressed herein do not necessarily reflect the views of the Department of the
Treasury or the U.S. Government.

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