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All Fall Down

Debt, Deregulation and Financial Crises

Jane D’Arista

All Fall Down traces the ways in which changes in financial structure and regulation eroded monetary control and led to historically high levels of debt relative to GDP in both developed and emerging economies. Rising stocks of debt drove the global financial system into crisis in 2008 when households, businesses, financial institutions and the public sector in some countries strained to generate sufficient income for debt service. The stagnation and fall in asset prices that followed began the process of unwinding that led to a run on the financial sector by the financial sector.
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Chapter 26: Creating a system-wide asset-based reserve system

Jane D’Arista

Extract

Creating an asset-based reserve system would require changes in the way the Fed conducts monetary policy and in the structure of its balance sheet as well as the balance sheets of private financial firms. As it does now in transactions with dealers in government securities, the Fed purchases assets from (and subsequently returns them to) the asset side of private financial firms’ balance sheets. Tables in this chapter show these changes for the Fed as a shift of bank reserves from the liability to the asset side of its balance sheet and a shift in repurchase agreements and financial sector discounts to the liability side of its balance sheet. The central bank would earn interest on the repos it holds and the collateral it holds for discounts in exchange for the interest-free liabilities it creates for private institutions.

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