An Illustrated Guide to the Structure of Global Markets

Policy Tensor

There was a Copernican revolution in 2008 in our understanding of finance and economics. There was, of course, the rediscovery of the non-neutrality of money. Macroeconomists had pretended for a half century that whatever finance was supposed to do in the economy could be captured by the money multiplier that related the quantity of money in the economic system to central bank policy. The entire edifice of modern macroeconomics was build on the premise that bracketing finance was an effective simplifying assumption; that what banks did was intermediate between savers and borrowers; that what really mattered were real quantities behind ‘the veil of money’. This paradigm mattered in the detail. Eg, Bernanke explained the failure of long-term rates to rise, despite Greenspan’s clockwork hikes in the mid-2000s, as a result of ‘a global savings glut’.

What was rediscovered in 2008 was that developments endogenous to the financial system had real…

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