The Hierarchy of Money and Inherent Instability of Credit: Reconceptualizing the Debt Crises of Greece and Italy and the Measures of the ECB

Rasmus Bang Kristensen

Student thesis: Master thesis


Recurrently, we see periods of instability or crises in the global financial system, which typically lead to severe consequences in our economies, calling for monetary accommodation from the central banks. We have recently seen examples of this not being enough to solve the economic challenges of the aftermath, as monetary stimulus sometimes mainly is absorbed by the financial markets and not resulting in a recovery of the private sector. This can leave governments in significant debt issues and can result in serious economic recessions. The aim of this study is partly to examine different conceptual approaches that often are left out of mainstream economic debate about the issues above and combine these into a theoretical framework, much of it revolving around the nature and function of money and credit in some form or another. It is thus more philosophically inclined in its approach than most studies on this topic. Examined topics include the idea of our monetary system as ‘hierarchical’, financial markets being ‘inherently unstable’, economies going through periods of ‘balance sheet recessions’, and also thoughts about central bank policies, specifically the increasing importance of ‘collateral frameworks’. The concepts will then be applied to the debt crises of Greece and Italy in order to understand the causes and primarily the ongoing challenges of solving them, but also as using the empirical case as a point of iteration and further understanding of the theory. From this, a discussion of likely scenarios from the approaching withdrawal of quantitative easing by the European Central Bank will be discussed, as well as how its future policy framework might look like. Finally, the thesis discusses the domain, or limits, or central banks and why sometimes monetary stimulus is not enough on its own right. In short, my main research question is: Research question: Using a hierarchical money view to help reconceptualize the causes of financial instability and its connection to economic recessions, how can we rethink policy responses to more appropriately deal with these challenges? What can this theoretical framework tell us about the ongoing debt challenges of Greece and Italy, as well as the measures of the ECB? The main method for answering this is through conceptual analysis and comparison of the theories mentioned, along with a few others, and then using the resulting framework to analyse the debt crises and the measures taken to handle them, including empirical data such as inflation rates in Greece and Italy, the balance sheet of the ECB, debt levels, and yield responses to measures of the ECB. The approach is qualitatively analytical and aimed at broader conceptual discussions of 3 financial and economic theory, rather than a precise quantitative study and modelling of the debt crises. On this basis the main conclusions on the case are that the slow economic recovery of Greece and Italy lie in the focus of monetary accommodation, while little fiscal stimulus has been provided in times of austerity. Since much of the private sector in these countries are undergoing a balance sheet recession, characterized by debt minimization, the monetary policies do not translate into increased borrowing, because of a lack of demand for additional credit. From a lender’s perspective, many of the banks in Greece and Italy are crippled by large amounts of non-performing loans, increasing their liquidity preference and to some degree sterilizing the efforts of the ECB. This in turn leads to a financialization of the economy, where the upswing mainly lies in liquid assets, compared to long-term investments in capital goods for example. While the immense monetary support from the ECB did translate into lower yields of the debt-ridden countries, the solution lies in increased fiscal stimulus as long as investments in the private sector is lacking; thus, the study does not see austerity in the countries as a solution to improving their debt sustainability in the longer run. Finally, in terms of monetary policy in the future, specifically of the ECB’s collateral framework, a model as ‘a pawnbroker for all seasons’ is presented as an alternative – knowing that with the inherent instability of credit, it will be called upon at some point again.

EducationsMsc in Business Administration and Philosophy, (Graduate Programme) Final Thesis
Publication date2018
Number of pages73
SupervisorsOle Risager