Abstract: This article proposes a unified regulatory approach to the issuance of “money-claims”—
a generic term that refers to fixed-principal, very short-term IOUs. The
instability of this market is arguably the central problem for financial regulatory
policy. Yet our existing regulatory system lacks a coherent approach to this
market. The article proposes a public-private partnership (PPP) regime, under
which only licensed firms would be permitted to issue money-claims. (De
minimis exceptions would not be problematic.) Licensed money-claim issuers
would be required to abide by portfolio restrictions and capital requirements. In
addition, the government would explicitly insure licensed issuers’ outstanding
money-claims, in return for a fee. The article compares this PPP regime to the
prevailing alternatives. In particular, it considers the likely efficacy of (i) risk-constraint
regulation; (ii) “conditional” liquidity support (lender of last resort)
facilities; and (iii) the new Orderly Liquidation Authority, a centerpiece of the
recently enacted Dodd-Frank Act. The article identifies significant problems with
each of these approaches. It concludes that, although the PPP system raises
significant implementation challenges of its own, it compares favorably to the
available alternatives.