Money and the Public Debt: Treasury Market Liquidity as a Legal Phenomenon

Columbia Business Law Review, Vol. 2023, No. 1, 2023

114 Pages Posted: 29 Sep 2023

See all articles by Lev Menand

Lev Menand

Columbia University - Law School

Josh Younger

Columbia University

Date Written: August 23, 2023

Abstract

The market for U.S. government debt (Treasuries) forms the bedrock of the global financial system. The ability of investors to sell Treasuries quickly, cheaply, and at scale has led to an assumption, in many places enshrined in law, that Treasuries are nearly equivalent to cash. Yet in recent years Treasury market liquidity has evaporated on several occasions and, in 2020, the market’s near collapse led to the most aggressive central bank intervention in history.

This Article pieces together what went wrong and offers a new account of the relationship between money issue and debt issue as mechanisms of public finance. It argues that a high degree of convertibility between Treasuries and cash generally requires intermediaries that can augment the money supply, absorbing sales by expanding their balance sheets on both sides. The historical depth of the Treasury market was in large part the result of a concerted effort by policymakers to nurture and support such balance sheet capacity at a collection of nonbank broker-dealers. In 2008, the ability of these intermediaries to augment the money supply became impaired as investors lost confidence in their money-like liabilities (known as repos). Subsequent changes to market structure pushed substantial Treasury dealing further beyond the bank regulatory perimeter, leaving public finance increasingly dependent on high-frequency traders and hedge funds—”shadow dealers.” The near money issued by these intermediaries proved highly unstable in 2020. Policy makers are now focused on reforming Treasury market structure so that Treasuries remain the world’s most liquid asset class. Successful reform likely requires a legal framework that, among other things, supports elastic intermediation capacity through balance sheets that can expand and contract as needed to meet market needs.

Keywords: Money, Public Debt, Banking, Central Banking, Market Liquidity, Treasury Market, Bank Regulation, Financial Regulation, Broker Dealers, Hedge Funds, Federal Reserve, Repo Market, Shadow Banking

JEL Classification: G01, G21, G23, G28, E40, E41, E42, E44, E50, E58, H60, H63

Suggested Citation

Menand, Lev and Younger, Josh, Money and the Public Debt: Treasury Market Liquidity as a Legal Phenomenon (August 23, 2023). Columbia Business Law Review, Vol. 2023, No. 1, 2023, Available at SSRN: https://ssrn.com/abstract=4567016

Lev Menand (Contact Author)

Columbia University - Law School ( email )

435 West 116th Street
New York, NY 10025
United States

Josh Younger

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

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