Back to being a boring economist for a bit . . .

The stupidist thing I’ve heard on Lehmans: “I was taught in Economics 101 that you should not finance long-term investments with short-term money”.

No, that is what banks do.  They promise you can have your money immediately.  They then take your money and put it into longer/less liquid things, and earn a spread for taking the risk that you all remove your money at the same time.  It generally works, unless they choose stupid investments.

[This was meant to be the big moral punchline to the the BBC’s Love of Money programme, ‘The Bank that Broke the World.’  It was more fun to watch than my earlier post indicated – more about the deal-making that didn’t happen, than the weird dynamics of banking.]

After Liam Halligan, I’m on an Austrian Look out.  Here is the (rather more cerebral) Arnold Kling, denying MV= PY, and seemingly attacking both Keynesian AND the idealist-monetarist views of Scott Sumner:

In my view, the fall in nominal GDP was due to the fact that real GDP had to fall. Real GDP had to fall, because the economy was beginning a Great Recalculation. The Great Recalculation was mostly due to the end of the housing bubble and the shrinking of the financial sector. It was probably exacerbated by the panic generated by Paulson and Bernanke. I do not see how the Recalculation was helped by the bailouts, which were huge transfers from future U.S. taxpayers to current large creditor institutions, including many overseas. I do not see how the Recalculation would have been helped by the Fed suddenly printing a whole lot more money.

Hat-tip: the never-sleeping Tyler Cowen. (whose question No 5 about European outcomes defeats the simple monetarist views)

Crudely, I’m defining as Austrian anyone who thinks the problem was malinvestment/the wrong shape of the economy, therefore cushioning the fall was a bad idea.  I disagree with it, obviously: allowing such steep falls produces longlasting damaging effects (hysteresis), and the economy’s structure was not so distorted (see previous post on Size of Financial Sector).

Simon Ward’s blog is a must for anyone interested in Money data and what it means for the economy.  (That’s both of you).  The answer to “why” is in the title: “Money Moves Markets”.

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2 thoughts on “This is what banks DO . . .

  1. wow – that looks really interesting. Next project is QE, so I may ask for some words of advice from time to time

    thanks

    G

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