Juan Ramón Rallo, “A vueltas con el tipo de interés natural,” 9 August.According to this, Sraffa’s natural rate,
“would be the interest rate that would prevail in a barter economy; the second [sc. interest rate] (mine) would be the intertemporal equilibrium rate for terms and risk (yield curve) that would prevail in a monetary economy under the assumption that there was no maturity mismatch and risks.”First, Rallo’s “maturity mismatch” theory seems to require 100% reserve banking and only fixed term loans. If not, then how can a fractional reserve banking system possibly be compatible with the idea of no “maturity mismatch” between monetary savers and lenders?
“vendría a ser con la tasa de interés que prevalecería en una economía basada en el trueque, la segunda (la mía) sería la tasa de equilibrio intertemporal, por nivel de plazo y riesgo (curva de rendimientos) que prevalecería en una economía monetaria bajo el supuesto de que no hubiese descalce de plazos y riesgos.”
Secondly, what does this monetary equilibrium interest rate do?
It must clear the market for loanable funds, and it must also clear the markets for capital goods, in order to create intertemporal equilibrium. But such a thing is impossible in a monetary economy in disequilibrium because, as Sraffa showed, there could be as many natural rates as types of capital goods, and a monetary interest rate cannot be equal to all.
But if this monetary equilibrium interest rate does not clear the markets for capital goods, then it cannot provide coordination of real saving and investment.
At most, it would clear the market for loanable funds, but this cannot create intertemporal coordination because the whole time preference theory of loanable funds is false.
1) As I explained, no: it does not requiere 100% reserve, it just requiere banks to match maturities; i.e, if they borrow short they can only lend short and against self-liquidating assets. If the borrow long (bond issues of different maturities) they can also lend long.
ReplyDelete2) Sraffa tried to prove that in a barter economy in desequilibrium there is no single interest rate. He did not try to prove that in a monetary economy there is no single monetary interest rate. Indeed, there is one (one for each maturity and level of risk) that do clear the market of capital goods and lonable funds.
JRR
"As I explained, no: it does not requiere 100% reserve, it just requiere banks to match maturities; i.e, if they borrow short they can only lend short and against self-liquidating assets."
DeleteBut that requires that all bank loans must be fixed term loans (or, that is to say, time deposits). / Pero eso requiere que todos los créditos bancarios deben fijarse préstamos a largo plazo (o, es decir, los depósitos a plazo).
This means that, in your system, there can be no demand deposits, no checking accounts and no callable saving accounts.
That is the same thing as 100% reserve.
No, there can be demand deposits against demand loans (or what is the same: against short term loans backed by self-liquidating credits). You cannot create demand loans against mortgages, that is true.
ReplyDeleteFor instance:
Assets: 10 oz gold; 90 oz demand loans.
Liabilities: 100 oz demand deposits.
There you have fractional reserve banking (money multiplier equals 10) but no maturity mismatching.
JRR
(1) OK, thanks for this clarification: I think I understand your system now. / Bueno, gracias por esta aclaración: Creo que entiendo su sistema ahora.
Delete(2) You are saying: there can only be callable loans against callable deposits.
If I take $100,000 to a bank, and then open a demand deposit (with a 10% reserve requirement), then the bank can only lend out $90,000 in a callable loan to a business or in a consumer loan. /
Usted dice: sólo puede haber créditos exigibles contra depósitos exigibles.
Si tomo 100.000 dólares a un banco y, a continuación, abrir un depósito a la vista (con un encaje del 10%), el banco sólo puede prestar 90.000 dólares en un crédito exigible a una empresa o en un préstamo de consumo.
(1) But your system would simply cause the credit markets and level of investment to collapse in any modern capitalist society.
DeleteVery few businesses or consumers would want to borrow money in loans that are repayable on demand. Your system is too inflexible.
(2) also, it still requires commitment to the time preference loanable funds theory of interest.
In fact, in order to achieve intertemporal coordination, this monetary theory of interest strongly implies that both consumer goods and capital good are homogenous.
Just because I save $100,000 and put it in a bank for a year loan, it does not follow that the correct real resources available for a-year-long capital investment are available, unless all consumer goods and capital goods are just homogenous putty and perfectly substitutable.
I thought that you would follow postkeynesian banking theory more strictly. Banks do not need deposits to lend, they create deposits when lending.
ReplyDeleteOn the other hand, if I take $100,000 to a bank and open a demand deposit, banks should only discount self-liquidating credits. Otherwise, maturity mismatching would be shift from the banks shoulders to the consumer/entreprise one's (the enterprise would have a demand liability and would use the capital received in order to invest in long-term projects).
If you have not read it, you may be be interested in this important article of Melchior Palyi explaining the concept of a liquid banking system: you need not that one bank is liquid, but that every agent is in a liquid state if you want to avoid wholesale forced liquiditaion. http://www.fame.org/HTM/Palyi_Malchor_Liquidity_MP-001.HTM
JRR
If "self-liquidating credits" means a bank loan that the bank can call back from the lender on demand, I understand your position.
DeleteYet my critique above still applies.
In fact, Post Keynesian banking theory -- which does indeed describe the real world -- is incompatible with the crude loanable funds version of bank lending.
It is precisely because the real world is not in equilibrium that fractional reserve banking that creates new money by deposits is a fundamental source of investment in modern capitalism.
1) Not just that "can call back from the lender on demand", but the lender is able to fully repay it without capital losses i.e. liquidation).
Delete2) My point is: real world be not be in equilibrium, but by maturity mismatching you push it further away from equilibrium
JRR
(1) So you are saying that the lender must have collateral assets that he can sell (liquidate) to repay his (callable on demand) loan as well?
DeleteThis would mean that hardly anyone who is not already rich could obtain a mortgage or engage in capital investment via "self-liquidating loans", and the number of normal people who would want to be locked into strict fixed term loans would be small too. The financial system would implode.
(2) see my critique (2) above.
(2)
1) No, if you borrow long. Remember: self-liquidating loans are only a condition for lending against demand deposits.
Delete2) I copy my reply: "By saving, you allow entrepreneurs to acquiere control of real resources. Of course, real resources used in consumers goods industries cannot be shift without losses to capital goods industries (or resources from some capital goods industries to other capital goods industries). But: if a bank which does not mismatch maturities offers a 5% to a one year saver is because the bank expects to be able to lend capital one year to some entrepreneur, and that entrepreneur will be willing to demand a one year loan at a 5% interest to a bank because he expects to invest the money capital into real capital and get at least a 5% return. Of course, many things can go wrong (many chains of expectations), but I do not assert that economic agents never err. They do their best for coordinating themselves, but even though discoordination may arise".
JRR
"Remember: self-liquidating loans are only a condition for lending against demand deposits."
DeleteYes, that is what I am saying.
And a "self-liquidating loan" given to lender against a "demand deposit" also requires the lender to have collateral assets that he can sell (liquidate) to repay his self-liquidating loan? Yes or no?
1) I do not understand your point. Do you think that borrowers prefer to borrow short or long? Who is in a more illiquid position? The one who is indebted long term or the one that is indebted short term? On the other hand, if you are referring that lenders prefer to lend short than long term, that is a question of price: if long term loans yield a higher return than short term ones, you could shift (the same happens with risk).
Delete2) Again, I do not understand enterely your point. Let me express with balance sheets:
Borrower: He has a 1-month bill issued against fast moving consumer goods (goods about to be sold to final consumers). --> Assets: 100 oz bill. Liabilities: 100 oz net worth.
The bank discounts the bill by buying it against issuing its own demand deposits --> Bank assets: 100 oz bill // Bank Liabilities: 100 oz demand deposits. This discount changes the composition of the borrower balance sheet --> Assets: 100 oz in demand deposits against the bank; Liabilities: 100 oz net worth (I assume for simplicity zero discount rate).
JRR
1) No, it would avoid speculative and Ponzi financing schemes (in a Minskyian sense). Consumers want to borrow long, so banks would have to do the same in order to lend long. This is just something similar to what Glass intended to do when separating commercial and investment banking.
ReplyDelete2) By saving, you allow entrepreneurs to acquiere control of real resources. Of course, real resources used in consumers goods industries cannot be shift without losses to capital goods industries (or resources from some capital goods industries to other capital goods industries). But: if a bank which does not mismatch maturities offers a 5% to a one year saver is because the bank expects to be able to lend capital one year to some entrepreneur, and that entrepreneur will be willing to demand a one year loan at a 5% interest to a bank because he expects to invest the money capital into real capital and get at least a 5% return. Of course, many things can go wrong (many chains of expectations), but I do not assert that economic agents never err. They do their best for coordinating themselves, but even though discoordination may arise.
JRR