US Government Debt Different - Finance Department - University of ...

42 A Macro View of Shadow Banking: Do T-Bill Shortages Pose a New Triffin Dilemma?backing. As institutional cash pools rose as a share of GDP and federaldebt and the supply of U.S. Treasury bills barely changed, theU.S. banking system intermediated an ever larger share of institutionalcash pools, trying to issue instruments for them just as safe asTreasury bills. But the more “private bills” they issued, the less safethey became. Just as the dollar’s at par convertibility to gold becamequestionable in the 1970s, so did the convertibility of banks’ andshadow banks’ instruments on demand and at par.One simple solution to this problem would be to increase the supplyof Treasury bills to “crowd out” from money markets excessivevolumes of wholesale funding raised by banks and shadow banks.This would influence the relative size of government-only and primemoney funds so that funds would flow more into government-onlyfunds and away from the riskier prime funds.As others have argued (see Greenwood, Hanson and Stein (2010)and Krishnamurthy and Vissing-Jorgensen (2010)) Treasury bills arelike money and are substitutes to bank deposits. In an “electronic”setting - the realm of institutional cash investors - Treasury bills essentiallyfunction as money. In fact for some large investors, cash is“U.S. Treasury bills in a segregated custodial account at a clearingbank” – hardly what comes to mind when one thinks of “cash”.The ultimate macro-prudential question around shadow bankingis whether it is the banking system that should intermediate institutionalcash balances under a strict supervision and regulation ofprivate money creation or whether it is the U.S. Treasury that shouldintermediate them by issuing more Treasury bills. The latter solutionwould imply rollover risks from the system migrating from the(shadow) banking system to the balance sheet of the sovereign. Thatis an externality. However, it is a smaller externality than those associatedwith levered, uninsured maturity transformation and theirflipside of forced sales during crises. In crises, the associated risks endup on the balance sheet of the sovereign anyway. The recognition ofthe inevitability of such contingent claims under regimes of excessiveprivate money creation points to the benefits of internalizing some ofthese risks on the balance sheet of the sovereign ex ante.