Money in the Time of Coronavirus
D. Awrey, Here We Go Again? Not Really

March 17, 2020

Dan Awrey, Cornell Law School

The global pandemic unleashed by the coronavirus has inadvertently shone a spotlight on the design of some of our most important monetary institutions. It has also revealed widespread misunderstandings about how these institutions work—especially in times of crisis.

In response to the escalating economic fallout of the coronavirus, central banks in the United States and elsewhere have used their emergency lending authority to mount a series of important policy interventions. On March 12th, the Federal Reserve announced that it will make available up to $USD1.5 trillion in liquidity support—that is, loans—to primary dealers through its existing term repo operations. On March 15th, the Fed then announced that it would reduce its target interest rate to a historic low, reactivate its crisis-era USD swap lines with other major central banks, reduce borrowing costs for banks at its discount window, and eliminate bank reserve requirements. Treasury Secretary Steven Mnuchin, meanwhile, announced that he would ask Congress to remove legal constraints, introduced under the 2010 Dodd-Frank Act, on the Fed’s emergency lending authority to non-bank financial institutions.

The stated rationales for these interventions are “to address temporary disruptions in Treasury financing markets” and “support the flow of credit to households and businesses”. More generally, giving central banks the legal authority to undertake these types of interventions is designed to advance two fundamental policy objectives. The first is to prevent dislocation within private money markets from triggering the failure of otherwise healthy banks and other financial institutions, along with the consequent withdrawal of lending, deposit-taking, and other key financial services. The second is to provide an effective counterweight against potential reductions in the aggregate money supply that might otherwise trigger a deflationary spiral characterized by a broad-based decline in prices, economic output, and employment. In a world where the vast majority of our money consists of short-term liabilities issued by private financial institutions, giving central banks this authority represents an important public bulwark against the intertwined threats of financial and monetary instability.

Yet to a great many observers, these latest interventions have evoked an instinctive response: here we go again. Just as they did during the financial crisis of 2007-09, the Federal Reserve and Treasury Department are bailing out Wall Street whilst letting Main Streets across America fend for themselves. This response reflects a number of more substantive objections, voiced by commentators across the political spectrum. Perhaps the most common objection is that the Fed’s interventions represent a subsidy to banks and other financial institutions—one not generally available to other commercial enterprises, let alone the general public. Others point to the jarring disconnect between the speed and scale with which the Fed has taken action to “rescue the stock market” versus the Trump Administration’s slow, and to date far more modest, response to the underlying public health crisis. Yet others worry that the Administration will use any expansion of the Fed’s emergency lending powers to advance its own private political and economic interests. These objections reflect a growing sense of déjà vu, along with frustration that we have somehow failed to heed the lessons of the last financial crisis.

These objections are all valid and, given the devastation wrought by the last crisis, understandable. In light of the present circumstances, however, they are also misplaced. On the first objection, few would seriously deny that these interventions are not subsidies. In theory, banks can now borrow at the Fed’s discount window at 0.25% for 90 days and immediately turn around and invest the proceeds in risk-free 3-month Treasury securities currently yielding 0.28%, 3-year Treasury securities yielding 0.58%, or 30-year Treasury securities yielding 1.56%. That’s easy money. Yet the real question is not whether these interventions represent a subsidy, but whether this subsidy advances important and socially desirable policy objectives. Given that the counterfactual is a full-blown financial crisis alongside the existing public health crisis, the answer would appear to be a resounding yes. Indeed, there is a strong argument that it is precisely these types of exogeneous demand shocks that should be amongst the least controversial uses of the Fed’s emergency lending authority. Put bluntly: this is what the Fed was built for.

On the second objection, the fact that the Fed has responded relatively quickly to contain the potential economic fallout from the coronavirus seems like misdirected criticism. Ideally, of course, the Fed’s interventions would be accompanied by complementary fiscal policy measures. Yet while Congress may still take action in the coming days, its failure to do so reflects the current level of political dysfunction in Washington—dysfunction in which the Federal Reserve has admirably played little or no role. Nor, similarly, can the Fed prevent President Trump from running roughshod over the Emolument’s Clause. Ultimately, the idea that the Fed should not throw out a life preserver simply because there is an idle coast guard cutter anchored a few miles offshore seems like a remarkably short-sighted rescue strategy. It is not the Fed’s fault that it has become the only game in town.

Perhaps even more importantly, these objections are fundamentally mistimed. As distasteful and unjust as it may often seem, the Fed’s emergency lending authority reflects the logic and structure of our current monetary system. That system relies on banks, money market funds, and wholesale money markets to provide the vast majority of the money circulating within both the financial system and real economy. It is the fragility of these private markets and institutions, along with the potential impact of their failure on both financial and monetary stability, that ultimately necessitates the type of public backstop that is now under the spotlight. Undertaking the type of comprehensive structural reforms that might enable us to credibly rollback the Fed’s emergency lending authority is simply not possible in the thick of a crisis.

Against this backdrop, what the present crisis is revealing is our failure to use the last crisis as an opportunity to ask more fundamental questions about the type of monetary institutions that we, as a society, really want. Instead, we tinkered around the edges of the existing monetary architecture: imposing new constraints on the Fed’s emergency lending authority without asking whether these constraints would be credible in the absence of more meaningful structural reforms targeting systemically important banks, wholesale money markets, and other components of the so-called “shadow” banking system. Both logic and historical experience suggest that the answer would be no—and the current crisis is very much validating this prediction. As we begin to look beyond this crisis, the key insight may therefore be that the time has finally come to reevaluate, and potentially reimagine, the structure of our monetary system.

The good news is that there is no shortage of proposals for structural reform. Some of these proposals, such David Andolfatto and Jane Ihrig’s call for the Fed to create a standing repo facility, are designed to strengthen institutional support for the existing monetary system. Others, such as the proposal by Morgan Ricks, John Crawford, and Lev Menand to permit the public to open accounts at the Federal Reserve, envision far more fundamental changes to the nature of money and banking. Yet others attempt to grapple with the recent emergence and enormous growth of the shadow payment system and the risks posed by the resulting reappearance of bad money. My goal here is not to debate the relative merits and drawbacks of these proposals: although I sincerely hope that this roundtable, and justmoney.org more generally, will become a platform for doing so. Rather, it is to highlight that the current crisis may afford us with an opportunity to take this debate to a wider audience, to raise awareness of the importance of monetary design and, perhaps, to build momentum toward a new and better monetary consensus.

Unbundling Banking, Money, and Payments

Author: Dan Awrey

For centuries, our systems of banking, money, and payments have been legally and institutionally intertwined. The fact that these three—theoretically distinct—systems have been bundled together so tightly and for so long reflects a combination of historical accident, powerful economic and political forces, path dependence, and technological capacity. Importantly, it also reflects the unique and often under-appreciated privileges and protections that the law bestows on conventional deposit-taking banks. These privileges and protections have served to entrench banks as the dominant suppliers of both money and payments: erecting significant barriers to entry, undermining financial innovation and inclusion, spurring destabilizing regulatory arbitrage, and exacerbating the “too-big-to-fail” problem. Against this backdrop, the recent emergence of a variety of new financial technologies, platforms, and policy tools hold out the tantalizing prospect of breaking this centuries-old stranglehold over our basic financial infrastructure. The essential policy problem, at least as conventionally understood, is that creating a level legal playing field would pose a serious threat to both monetary and financial stability. This Article demonstrates that this need not be the case and advances a blueprint for how we can safely unbundle banking, money, and payments, thereby enhancing competition, promoting greater financial innovation and inclusion, and ameliorating the too-big-to-fail problem.

Awrey, Dan, Unbundling Banking, Money, and Payments (January 31, 2021). European Corporate Governance Institute – Law Working Paper No. 565/2021, Available at SSRN: https://ssrn.com/abstract=3776739 or http://dx.doi.org/10.2139/ssrn.3776739

Why Financial Regulation Keeps Falling Short

Authors: Dan Awry & Kathryn Judge

This article argues that there is a fundamental mismatch between the nature of finance and current approaches to financial regulation. Today’s financial system is a dynamic and complex ecosystem. For these and other reasons, policy makers and market actors regularly have only a fraction of the information that may be pertinent to decisions they are making. The processes governing financial regulation, however, implicitly assume a high degree of knowability, stability, and predictability. Through two case studies and other examples, this article examines how this mismatch undermines financial stability and other policy aims. This examination further reveals that the procedural rules meant to promote accountability and legitimacy often fail to further either end. They result instead in excessive expenditures before new rules are adopted, counterproductive efforts to perfect ever more detailed rules, and too little re-evaluation of existing rules in light of new information or changed circumstances. The mismatch between the nature of finance and how finance is regulated helps to explain why financial regulation has failed in the past and why it will likely fail again. It also suggests the need for a new approach to financial regulation, one that acknowledges the limits of what can be known given the realities of today’s complex and constantly evolving financial ecosystem.

Awrey, Dan and Judge, Kathryn, Why Financial Regulation Keeps Falling Short (February 1, 2020). Columbia Law and Economics Working Paper No. 617, Cornell Legal Studies Research Paper No. 20-03, European Corporate Governance Institute – Law Working Paper No. 494/2020, Available at SSRN: https://ssrn.com/abstract=3530056 or http://dx.doi.org/10.2139/ssrn.3530056


Special Edition: Money in the Time of Coronavirus

Special Edition: Money in the Time of Coronavirus

Prompt for Discussion

Contributors: Katharina Pistor, James McAndrews, Saule Omarova, Mark Blyth, Jamee Moudud, Elham Saeidinezhad, Dan Awrey, Fadhel Kaboub, Leah Downey, Virginia France, Lev Menand, Nadav Orian Peer, Robert Hockett, Carolyn Sissoko, Jens van ‘t Klooster, Oscar Perry Abello, and Gerald Epstein

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The financial strains brought by the coronavirus outbreak feel strangely reminiscent of 2008, and yet, markedly different. In the United States, at the writing of this prompt, the S&P 500 has crashed 25%, and the federal funds target rate is once again moving towards the zero bound. The treasury securities market is in disarray, and the Federal Reserve is set to increase its repo lending by over one trillion. In Washington, the administration’s insistence that concerns were overblown is now replaced with negotiations over the size and shape of a stimulus package. “I don’t want to use the b-word”, said a senior administration official about plans to support distressed industries, like airlines. The b-word is, of course, bailout. 

So far, so 2008. But the monetary dynamics we are witnessing in the time of corona also take us into new territory.  The proximate cause of the crisis past came from within the financial system itself: the housing credit bubble and abuses in subprime lending. The corona crisis, on the other hand, emerges from a material threat to human health.   Where the 2008 crisis revealed the vulnerabilities of financial globalization, the corona crisis is disrupting the global production system, upending supply chains, and threatening shortages in essential inventories.  

We wonder about the extent to which the policy arsenal of 2008 can contain the dislocations currently occurring, and what, exactly, stimulating consumer demand means when the consumer herself is in quarantine.  Moreover, the crisis response to the corona crisis is taking place within an institutional setting that was itself reshaped by the 2008 crisis reforms. As corona strains unfold, it remains to be seen whether the promise of financial resilience will be borne out, or whether fundamental design flaws left in place will frustrate reformers’ efforts. 

In this Special Edition Roundtable, JM invites contributors to provide live analysis of money in the time of corona, here in the U.S., and around the world.




June 29, 2020
Roundtable Wrap-up
Sannoy Das, Harvard Law School

May 21, 2020
Human Capital Bonds and Federal Reserve Support for Public Education: The Public Education Emergency Finance Facility (PEEFF)
Gerald Epstein, University of Massachusetts 

May 12, 2020
The Fed Should Bail Out Low-Income Tenants and Not Just Banks and Landlords
Duncan Kennedy, Harvard Law School

April 29, 2020
Getting to Know a Brave New Fed
Oscar Perry Abello
, Next City

April 10, 2020
The Problem with Shareholder Bailouts isn’t Moral Hazard, but Undermining State Capacity
Carolyn Sissoko, University of the West of England

April 2, 2020
Crises, Bailouts, and the Case for a National Investment Authority
Saule Omarova
, Cornell Law School

March 31, 2020
Why the US Congress Gives Dollars to the Fed
Jens van ‘t Klooster, KU Leuven and University of Amsterdam

March 26, 2020
A Fire Sale in the US Treasury Market: What the Coronavirus Crisis Teaches us About the Fundamental Instability of our Current Financial Structure
Carolyn Sissoko, University of the West of England

March 25, 2020
The Democratic Digital Dollar: A ‘Treasury Direct’ Option
Robert Hockett, Cornell Law School

March 22, 2020
Derivative Failures
James McAndrews, TNB USA Inc. and Wharton Financial Institutions Center

March 20, 2020
The Case for Free Money (a real Libra)
Katharina Pistor, Columbia Law School

March 19, 2020
The Monetary/Fiscal Divide is Still Getting in Our Way
Leah Downey, Edmond J. Safra Center for Ethics
at Harvard University

March 18, 2020
Is Monetary System as Systemic and International as Coronavirus?
Elham Saeidinezad, UCLA Department of Economics

March 17, 2020
Here We Go Again? Not Really
Dan Awrey, Cornell Law School

March 16, 2020
Repo in the Time of Corona
Nadav Orian Peer, Colorado Law

March 16, 2020
Beyond Pathogenic Politics
Jamee K. Moudud, Sarah Lawrence College

March 15, 2020
Economic and Financial Responses to the Coronavirus
James McAndrews, TNB USA Inc. and Wharton Financial Institutions Center


Bad Money

Author: Dan Awrey

Money is, always and everywhere, a legal phenomenon. In the United States, the vast majority of the money supply consists of monetary liabilities — contractually enforceable promises — issued by commercial banks and money market funds. These private financial institutions are subject to highly sophisticated public regulatory frameworks designed, in part, to enhance the credibility of these promises. These regulatory frameworks thus give banks and money market funds an enormous comparative advantage in the issuance of monetary liabilities, transforming otherwise risky legal claims into so-called “safe assets” — good money. Despite this advantage, recent years have witnessed an explosion in the number and variety of financial institutions seeking to issue monetary liabilities. This new breed of monetary institutions includes peer-to-peer payment platforms such as PayPal and aspiring stablecoin issuers such as Facebook’s Libra Association. The defining feature of these new monetary institutions is that they seek to issue money outside the perimeter of conventional bank and money market fund regulation. This paper represents the first comprehensive examination of the antiquated patchwork of state regulatory frameworks that currently, or might soon, govern these new institutions. It finds that these frameworks are characterized by significant heterogeneity and often fail to meaningfully enhance the credibility of the promises that these institutions make to the holders of their monetary liabilities. Put bluntly: these institutions are issuing bad money. This paper therefore proposes a National Money Act designed to strengthen and harmonize the regulatory frameworks governing these new institutions and promote a more level competitive playing field.

Awrey, Dan, Bad Money (February 5, 2020). Available at SSRN: https://ssrn.com/abstract=3532681or http://dx.doi.org/10.2139/ssrn.3532681