Discussion — Lecture 17: Direct and Indirect Finance

This session covers Lecture 17: Direct and Indirect Finance

Until now, we haven't been talking as much about banks as intermediaries. The lecture will help us think about next week's Gurley and Shaw reading, which emphasizes indirect finance and intermediation. Mehrling tells a story about how the money market and capital market became intertwined, why long-term borrowing went from being non-intermediated to intermediated, and how risk can still pass through intermediated borrowing.

We start with the more intuitive description of simple, traditional "Jimmy Stewart" banking. Mehrling then describes the evolution and emergence of shadow banking as an iterative process of intermediation and disintermediation. Money-market funding helps give "shiftability" to capital assets, and liquidity to capital markets.

We can think of the financial crisis of 1929 and 1930 as a collapse of their version of a shadow banking system. The Fed refused to backstop the shadow banking activity, and allowed the system to collapse.

Lecture Notes

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