7.2. What counts as money: drawing the line As we discovered in Chapter 4, identifying what counts as money is not easy. Financial innovation means that when an instrument is defined and controlled as ‘money’, Goodhart’s Law suggests that substitutes will be found to enable evasion of tax and regulation.4 Such instruments include derivatives based on loans that are secured on highly illiquid assets such as houses. Although never really considered as money, such instruments have been increasingly traded in a moneylike fashion: moved around the world at great speed and frequency by investment banks, hedge funds and other global financial actors, but as the financial crisis has revealed, their acceptability among financial institutions ultimately depends upon the strength of the credit-debtor relationship. When it became clear during the financial crisis of 2007-8 that many of the mortgage-backed securities in the US were based on subprime loans whose borrowers were likely to default, the result was a fast and systemic collapse of confidence between banks as these debts had been spread over such a wide range of banks’ assets. These mortgage-backed securities turned from being highly liquid and money-like; easily bought and sold, to being highly illiquid in a matter of days. So expectations are central to liquidity and ‘money-ness’. When expectations concerning future systemwide developments are stable and widely shared, then a wide spectrum of private liabilities will be regarded as liquid and will find a place in the portfolios of those financial institutions whose current operations generate a surplus of revenues over expenditures.5 Thus liquidity itself becomes highly subjective and the potential for the type of systemic collapse in liquidity we have already seen significantly increases. A further difficulty in defining money arises from the tension between its role as a means of exchange – where the more liquid the better – and its role as a store of value, where generally assets which are less liquid, such as homes, tend to hold their value more effectively against inflation.6 It may be that different conceptions of money are partly driven by the relative importance that people place on the different functions of money at different times – whether they consider its usefulness as a store of value to be the most important aspect, or its usefulness and availability as a means of exchange. This tension merits further research, because it points to the possibility that no single form of money will perform all the functions of money equally well.
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