Once you've adopted the dealer, you know something. You that market liquidity comes from somewhere. Market liquidity depends on profit making dealers. The assumption of perfect liquidity, that you can alter your portfolios, you can buy and sell, you can buy risky, sell risky all at the efficient price. This is a assumption, this is an assumption that liquidity is a free good. And in the real world, it's not a free good, there is a dealer. There's a dealer who is behind the scenes. When you want to buy risky he sells you risky. When this person wants to sell ,he buys it from you. Unless these things are completely, perfectly lined up in time so that the dealer doesn't have to take any of it on his balance sheet, he'll have to take it on his balance sheet. And when he takes the imbalance on his balance sheet that will move prices. So prices are not going to be stable, are not going to stay here. Even if this is a move in fundamental or expectations about fundamentals, the implication, all this trading, is that prices are going to move some more. They're going to move some more because of the trading, not because of the fundamentals, because of the trading. The steps from the finance view to the money view. Step one is to appreciate, which I think it's pretty clear Fisher-Black did. That market liquidity By which we mean the ability to buy or sell without moving the price in volume fast, market liquidity depends on the dealer system. It's not free. There's not some frictionless surface assumption that could ever be true about the real world. At least a real world in which there was market liquidity. In which you could buy and sell freely, that costs something. And dealers have to make money. And so the economics of the dealer functions says prices are going to deviate from their fundamentals, that's the first point. The second point is that the ability of dealers to provide market liquidity depends on their own funding liquidity, their own capital also. Ability of dealers to supply depends on their own capital, their capitalization, and their ability to borrow and funding liquidity. One of things you'll see in the literature and finance, and these articles are assigned in finance courses often. There are articles about how the dealer's capital determines their ability to make markets. And if they lose their capital by losing money prices can deviate from fundamentals. That is still staying in the finance kind of world. It wouldn't matter if they lost their capital if they could also borrow, if they could just leverage up. So, from a money view, we want to put our emphasis on the funding liquidity piece, not the capital piece. And the funding liquidity can itself disappear even if your capital doesn't. If the banks who are funding you say I'm scared. I'm not going to fund you anymore. I'm not going to get you through this rough patch. You're going to just have to sell something. Then you have to sell something. So that's this, remember this economic dealer function, that's when the walls close in, the finance limits close in. We had some of that on the problem set. I'm not sure how far Fisher got. He certainly got to this. And I think by the time he died he got to this too. The third thing and this is what I would Insist, and what he would have resisted more strongly. Where does funding liquidity come from? Ultimately, the ultimate source of funding liquidity is the central bank. >> Ultimate source of funding liquidity, is the central bank. This is a long way to go intellectually, a long trajectory, for somebody who started with this quote that I gave you before about money can only be passive. Where is that quote? My papers have gotten in disorder, but you remember it. I motivated the whole thing by starting there. It's a long way to go to saying the central bank is actually kind of crucial as a backstop to the whole system. But we have not gone all the way to ISOM. We've not go on to say, well the central bank can fine tune by messing with the short term interest rate. The central bank can fine tune, can change business cycles even by doing that. I'm not so sure, in a financially developed economy, there are some issues there. Because the markets are playing a large role in determining the asset prices. The conditions of the dealers are playing a large role in determining the money market rate of interest. The way that the central bank changes the money market rate of interest is essentially to be a dealer. To say you don't want to take this onto your balance sheet and that's what's driving up money market rates, I'll take it into my balance sheet. I'll take the pressure off. I'll take it onto my balance sheet. Myla and why does that work? That works because the liabilities of the central bank are money. They're better than the liabilities of dealers. So I don't know if Fisher would of followed all this way. I wish we were able to have this debate, and all the way to the money view. Because the hierarchy of money, all of that, Is quite antithetical to finance view. A finance view is the only difference between this asset and that asset is their price. And it's all flat. It's all quantity. It's just different assets with different risk characteristics. The money view is it's not all flat. It's all hierarchical. And there is the best money, and there's the next best money, and then there's securities, which is what we started with in Lecture 2.