The IGM forum polls responses to this statement:
There is a social value to having institutions that issue liquid liabilities that are backed by illiquid assets.
Not one of the economists polled disagrees.
For mood-affiliation purposes, I would have said “agree.” But I think it is uncertain, only because such institutions seem to always end up codependent with government in ways that detract from social value.
What is the value in the maturity mis-match part? To trick people not to spend? If people think the money is available, they will tend to save, and then complacency or whatever makes them not withdraw it? (Until they do).
The phrasing implies that even if there was a way to not do it that we’d want to do it anyway.
I suppose the law of averages means typically not all the money will be needed even if a finite number of individuals need to withdraw deposits.
What I don’t understand is why some kind of anti-withdrawal incentive wouldn’t work and if it did work, be desirable.
The form of that question seems to indicate that the very aspects that create the instability itself provides some social value.
The problem is that illiquid assets do not actually properly “back” the liquid liabilities, or they back them badly and unsafely.
The quality of the liabilities depends on the quality of the assets: illiquid assets imply illiquid liabilities.
It is like selling security services, making people think they are safe, and then providing the service poorly, so that risk is actually much higher than people think it is.
Also here: assets tend to be over-valued in today’s pedal-to-the-metal world.
Hard to say “disagree” given the wide-open wording. There’s clearly “a social value,” but, to your point, that doesn’t necessarily mean that social value is net positive.
There is a social value to ponies, rainbows, and free lunches.
The problem comes from lack of rigor in the definition of “social value”, and in the implication that banking is the center of transactions, rather than just another transaction.
I expect all economists would disagree with “there is value to non-participants when a private business has long-term assets and short-term debt”.
A large part of the codependency may not have to do with the maturity transformation, it’s just the financial success. “That’s where the money is.” So banks end up with e.g. formal obligations to hold government bonds, and informal pressures to lend to connected cronies. Notice that other business sectors like docks and ferries and telephones end up attracting politicians too, and I don’t think it indicates that docks and ferries and telephones are lacking in social value, it indicates that they’re relatively fruitful for politicians to apply leverage to. Banks could easily have the same issue.
Absolute garbage! What social value will the next financial crisis have? Stupid business decisions backed by taxpayer money have negative social value. This is pure unadulterated sophistry.
This is why these survey questions are often of limited value. You might be answering the question, “do you think banks sometimes perform a useful function?”