The role of collateral

At the centre of the international Eurodollar system is collateral. Why is that so important and why are banks scrambling for it so much? As I alluded to yesterday, safe and liquid assets are what makes the system tick. It wasn’t always like this though. Before the Great Financial Crisis in 2008 the Eurodollar system was working fine.   

In the Eurodollar system, money was “created” by the magic of fractional reserve banking.  In his essay “The Euro-dollar Market: Some first principles”, Milton Friedman, writes about how a bank in London can create money through deposits by “the bookkeeper’s pen”. Before the GFC this was how the reserve currency was being made.

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