This research explores the trajectory of urbanization under capitalism and the evolutionary development of the financial system as a joint historical process. While design schools continue to propagate the famous Bauhaus adage "form follows function'', the particular historical reality of the American metropolis is that "form follows finance''. Focusing on the spatial consequences of the U.S. financial system since the 1830s, I argue that a general theory of urban rise and decline must establish explicit linkages between money, credit and banking and urban spatial structure. In particular, my research develops the case that money and finance are non-neutral with regard to space, principally because the institutional arrangements of finance matter for how the built environment evolves. In a globalizing economy, architecture and urban design thus have an increasing role in facilitating the circulation and accumulation of capital. The recent financial crisis was a powerful reminder that the inherent instability of the monetary-financial system is likely entail serious consequences for the real economy.In responding to the crisis, both national and international policy makers have identified several gaps in the perimeter of financial regulation as the main culprit for failing to prevent the financial meltdown and its reverberations throughout the global economy. In many ways, the financial crisis has highlighted the importance of Hyman Minsky's work on financial instability and, perhaps in a more subtle way, the larger writings of Post-Keynesians on the non-neutrality of money. Common to all of this work is the special attention that it pays to the role of the financial sector as a source of fluctuations in the real sector, including the spatial structure of regional economies. Paying particular attention to the analytic trinity of ideas, institutions and events, this research explores how the concept of "financial resilience" ought to be situated within the broader context of "money and the city" and the rapidly expanding research on urban resilience.

1. Conceptualizing Financial Resilience
David Bieri
Political Space Economy Lab, University of Michigan | @space_economy
VT Ridenour Faculty Fellowship Conference
Arlington, VA
October 2014

2. The fluttering veil
“It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution by tomorrow morning.”
Henry Ford (1922)

3. What are the questions?
•What is the relationship between resilience in the financial sector and resilience in the real sector?
•If “financial resilience” is a policy target, what are the corresponding policy instruments?
–How do “financial stability” and “macroprudential policy” relate to financial resilience?
–What is the role of increased leverage, excessive liquidity and maturity transformation, interconnectedness, and complexity?
•What are the appropriate units of analysis for financial resilience?
–Sectors: Households, nonfinancial firms, government, financial sector (banks and nonbank financial institutions)
–Scale: International, national, regional, local

4. Ideas, institutions and events

5. Ideas, institutions and events
•Ideas about the “nature of money” determine monetary analysis:
–Historical representation of economy as system of circular flows evolves with social imaginary.
–Common dichotomy across different economic paradigms: “real sector” (production and consumption) and “monetary sector” (money, credit and banking).
–Nature of real-monetary nexus as key distinction between schools of economic thought.
•Institutions represent the socio-economic arrangements that rest on and are influenced by specific ideas.
•Historical events give rise to new theoretical insights/ideas, in turn re-shaping institutions.

6. “Sunspots” and the credit cycle
Sources: Jevons (1884); Wagemann (1930); Diamond and Dybvig (1983); Kiyotaki and Moore (1997)

7. Money matters
Economic paradigm
Origins of economic cycles
Real-monetary sector relationship
Nature of crises
Spatial consequences
Classics
Real sector
Neutral
Resources
Not considered
Marxism
Real sector
Non-neutral
Over- accumulation
Urbanization
(Post) Keynesianism
Both sectors
Non-neutral
Financial instability
Not considered
Neoclassical (RBC)
Real sector
(Super)neutral
Exogenous shocks
Not considered
Monetarism
Monetary sector
Non-neutral
Inflation
Not considered
“New” urban economics, new economic geography
Real sector
Neutral
None
Agglomeration
Source: Bieri (2014a)

8. Financial stability: A variety of concepts
•Different definitional scope:
–Systems definition: Financial stability = “well-functioning financial system” (role for monetary policy?)
–Narrow definition: (Excess) volatility of specific observable financial variable (asset price volatility, interest rate smoothness)
•Historical perspective:
–Volatility-based instability (ERM 1980s/1990s, 1987 crash, 1994 EME bond markets, 1998 Russian default, 2001 Argentinean default, 2007/08 US subprime crisis).
–Stress-based instability (Default of individual institution. Credit-Anstalt 1931, Guardian National Bank 1933, Bankhaus Herstatt 1974, BCCI 1991, Barings 1995, LTCM 1998, recent institutional failures [Northern Rock, Bear Stearns, Lehman Brothers, AIG]).
–Crisis-based instability triggered by both real and financial sector imbalances.

9. Financial stability: A variety of concepts
•Traditional view: Financial regulation to minimize threats to the banking system and the economy from defaults or credit crunches (cf. Basel III, asset quality reviews, “stress tests”)
•Post-crisis “new normal”:
–Is stabilizing the banking sector enough to stabilize the whole financial system? No: Fragility of market financing arrangements and nonbank financial institutions (financial migration and “shadow banking”)!
–Central lesson: Defaults, credit crunches, and fire sales not just across institutions but also across securities and assets.
–Mitigation of the leverage cycle plus a systemic regulator to combat fire sales and their causes (cf. Basel III)
•Policy trade-off between monetary stability and financial stability?

10. We’re all “macroprudentialists” now
Regulatory and supervisory arrangements
“Macroprudential”
“Microprudential”
Proximate objective
Limit financial systems- wide distress
Limit distress of individual institutions
Ultimate objective
Avoid output (GDP) cost
Consumer protection (investor/depositor)
Model of risk
(In part) endogenous
Exogenous
Common exposures across institutions (correlations)
Important
Irrelevant
Calibration of prudential controls
Systems-wide distress, top-down
Individual institutions, bottom-up
Proximate objective
Limit financial systems- wide distress
Limit distress of individual institutions
Sources: Borio (2003), Bieri (2009)

11. Global monetary-financial governance
Source: Bieri (2009)

12. U.S. monetary-financial governance
Source: Bieri (2014b)

13. From stability to resilience
Scale/Sector
Households
Firms
(nonfinancial)
Government
Financial sector (Banks, NBFIs)
International
National
Regional/local
“Capitalism is essentially a financial system, and the peculiar behavioral attributes of a capitalist economy center around the impact of finance upon system behavior." – Minsky (1967): Issues in Banking and Monetary Analysis,1967. “To analyze how financial commitments affect the economy it is necessary to look at economic units in terms of their cash flows. The cash flow approach looks at all units – be they households, corporations, state and municipal governments, or even national governments – as if they were banks.” – Minsky (2008): Stabilizing and Unstable Economy, New York: McGraw-Hill.

14. A tale of two hierarchies
•Hierarchy of cities: Cities as “organisations”, positioned within a spatial order of economic production.
•Hierarchy of money: All money is credit money and credit is always and everywhere fundamentally hierarchical in nature. Credit allocation as a core function of modern states.
Historical interaction between urban and monetary hierarchy matters for distribution and evolution of economic activity across space.
Trajectory of spatial development and advancement of the monetary-financial system as joint historical process (Bieri 2013).
Nexus of hierarchies matters for financial resilience.

15. Hierarchy of cities
•Cities as “organisations” within a spatial order of economic production
–Diversity in size and scope from differences in scale economies relative to per-capita demand.
–Small number of large cities and large number of small cities
–Place in hierarchy is changing over time, depending on relative specialisation
Source: Conzen (1975)
Phase 3: Secondary Growth
Phase 2: Plowback
Phase 1: Frontier

16. Urban hierarchy: Theories
•Path dependency vs. standard narrative
•Higher productivity occurs because
–large cities disproportionately attract both high- and lows-skilled (“extreme-skill complementarity” of spatial sorting),
–large cities select more productive entrepreneurs and firms
–agglomeration economies (sunk cost, IRS)
•Urban efficiencies (“contrasts in agglomeration”) depend on
–Numbers (such as city or industry size),
–Nature of urban interactions (“The whys and wherefores of urban diversification” Chinitz 1961; Jacobs 1969)

17. Urban hierarchy: Laws of motion
•Agglomeration economies differ in important ways
–localization economies attenuate rapidly across space
–industrial organization affects the benefits of agglomeration
•The microeconomic determinants of agglomeration
–3 Marshallian transportation costs: “goods, people, ideas”
–Input-output linkages (input sharing, product shipping costs)
–Labor market pooling
–Knowledge spillovers
–Natural advantage (“first geography” vs. “second geography”)
•“Coagglomeration” matters
–General tendency of various industries to locate together,
–Clusters …

18. Hierarchy of money
•All money is credit money and credit is always and everywhere fundamentally hierarchical in nature
–The modern monetary-financial system (MFS) is hierarchical in finance and in power (“taxes drive money”, “lender/dealer of last resort”).
–MFS is a hybrid where public liabilities (“outside money”, a net asset to the private sector) and private liabilities (“inside money”)
–Spatial relationship between financial variables and institutional functions matters for urban development (e.g. interest rates or credit intermediation)
–Hierarchy of money shifts across economic cycle through three phases (hedge finance, speculative finance and Ponzi schemes)
–Money and credit fluctuate between states of discipline and states of elasticity (cf. Mehrling 2012).

19. Hierarchy of money
•Hierarchy of money:
•Hierarchy of balance sheets:
Money
Gold

Currency

Deposits
Credit
Securities
Central Bank
Banking System
Private Sector
Assets
Liabilities
Assets
Liabilities
Assets
Liabilities
Gold
Currency
Curreny
Deposits
Deposits
Securities
Securities
Source: Adapted from Mehrling (2012)

20. Monetary hierarchy: Theories
•Two main approaches to monetary theory
•Money as a medium of exchange, unit of account and store of value
–Money is a numéraire good, arising from portfolio preferences, intermediation technologies and high-powered government money
–Monetary sector forms “veil” behind which “real economy” operates
•Money as a form of credit (“credit theory of money”)
–Promise to pay income at some future point.
–Debt claims to assured income flows provide liquidity which can be bought or sold)
–Taxes-drive money view

21. Monetary hierarchy: Laws of motion
•Business cycles across different economic paradigms:
–Marxian: M – C – M’
–Keynesian: Y = C + I + G + (X-M)
–Monetarist: PY = MV (Quantity Theory)
–Flow of funds: sources of funds = uses of funds (endogenous money)
•Re-theorising money and finance within economic geography
–Taking history and institutions seriously
–Theorizing spatial aspects of the monetary-financial system

22. Case study: Detroit’s place in U.S. monetary-financial history
•Stereotype of land-capital dynamics: Detroit’s rise and fall within the U.S. urban hierarchy are largely driven by successive stages of monetary-financial evolution that enabled speculative real estate development.
•Prototype of financial instability: Institutional origins of financial instability and banking-led crises in Michigan begin in 1830s (Free Banking). Detroit is at the epicenter of 1933 banking crisis; municipal bankruptcy precedent in 2013.
•Archetype of frontier finance; As the financial frontier moves across time and space, different “zones of exclusion” emerge (mortgage speculation, large scale vacancies, financial illiteracy, underbanked sections of the population).

23. “Money interest” vs. “Public interest”
Detroit is at the epicenter of cyclical instability driven by the spatio-temporal evolution of the U.S. monetary-financial system and its urban hierarchy (Bieri 2014a).
–“Proto-Central Banking” (1795 – 1815)
–“The Great Banking Experiment” (1816 – 1845)
–“The Great Banking Crash” (1933)
–“The Securitisation Bubble” (2000– ) and the post-crisis normal
 Central tension between “money interest” and “public interest” (cf. Mehrling 1997) as a key theme for the last two centuries of Detroit’s economic history.

24. REFERENCES – I
Adrian, Tobias, and Hyun Song Shin. 2010. “The Changing Nature of Financial Intermediation and the Financial Crisis of 2007–09.” Annual Review of Economics 2(1): 603–18.
Bieri, David S. 2009. “Financial Stability, the Basel Process and the New Geography of Regulation.” Cambridge Journal of Regions, Economy and Society 2(2): 303-331.
Bieri, David S. 2013. “Form Follows Function: On the Relationship between Real Estate Finance and Urban Spatial Structure.” CriticalProductive 2(1): 7–18.
Bieri, David S. 2014a. Moonlights, Sunspots and Frontier Finance: The Historical Nexus between Money, Credit and Urban Form, Ann Arbor: Political Space Economy Lab. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2392673
Bieri, David S. 2014b. “Financial Stability Rearticulated: Institutional Reform, Post-Crisis Governance, and the New Regulatory Landscape in the United States ,” in Iglesias-Rodrígues, P. (Ed.) Building Responsive and Responsible Regulators in the Aftermath of the Financial Crisis, Cambridge, Intersentia Publishers.
Borio, Claudio E. V. 2013. “Towards a Macroprudential Framework for Financial Supervision and Regulation?” Working Paper No. 128, Basel: Bank for International Settlements.
Chinitz, Benjamin. 1961. “Contrasts in Agglomeration: New York and Pittsburgh,” American Economic Review, 51(2): 279–289.
Conzen, Michael P. 1975. “Capital Flows and the Developing Urban Hierarchy: State Bank Capital in Wisconsin, 1854–1895” Economic Geography 51(4): 321–338.
Copeland, Morris A. 1952. A Study of Moneyflows in the United States. Cambridge, MA: National Bureau of Economic Research.
Diamond, Douglas W. and Dybvig, Philip H. 1983. “Bank Runs, Deposit Insurance, and Liquidity,” Journal of Political Economy, 91(3): 401–419.
Jacobs, Jane. 1993. “Gradual Money and Cataclysmic Money” in The Death and Life of Great American Cities, New York: Random House; 380– 416.
Jevons, W Stanley. 1884. Investigations in Currency and Finance. London: MacMillan and Co.
Kiyotaki, Nobuhiro and Moore, John. 1997. “Credit Cycles,” Journal of Political Economy, 105(2): 211–248.
Lösch, August. 1940. Die räumliche Ordnung der Wirtschaft: Eine Untersuchung über Standort, Wirtschaftsgebiete und internationalen Handel . Jena: Gustav Fischer.
Lösch, August. 1940. Geographie des Zinses. Die Bank, 33:24–28.
Lösch, August. 1949. “Theorie der Währung: Ein Fragment,“ Weltwirtschaftliches Archiv, 62: 35–88.
Lösch, August. 1954. The Economics of Location, New Haven: Yale University Press.
Mehrling, Perry G. 1997. The Money Interest and the Public Interest: American Monetary Thought, 1920–1970 , Cambridge, MA: Harvard University Press.

25. REFERENCES – II Mehrling, Perry G. 2011. The New Lombard Street: How the Fed Became the Dealer of Last Resort. Princeton University Press. Mehrling, Perry G. 2012. “The Inherent Hierarchy of Money”, Mimeograph, Barnard College, Columbia University. Minsky, Hyman P. 1967. “Financial Intermediation in the Money and Capital Markets,” in Pontecorvo, G., Shay, R. P. and Gailord Hart, A. (Eds.) Issues in Banking and Monetary Analysis , New York: Holt, Rinehart and Winston: 33–56. Minsky, Hyman P. 1992. “On the Non-Neutrality of Money,” Federal Reserve Bank of New York Quarterly Review 18(1): 77–82. Minsky, Hyman P. 2008. Stabilizing an Unstable Economy. New York: McGraw Hill. Pozsar, Zoltan, Tobias Adrian, Adam Ashcraft, and Hayley Boesky. 2013. “Shadow Banking.” Federal Reserve Bank of New York Economic Policy Review 19(4): 1–17. Wagemann, Ernst F. 1930. Economic Rhythm: A Theory of Business Cycles. 1st ed. New York, NY: McGraw Hill.