Comments on: Maturity Transformation

By: Ralph Musgrave

Ralph Musgrave — Sat, 21 Aug 2010 10:07:58 +0000

You are right: I think that having banks offer two types of account is the best solution. I can think of further arguments for this (which others have probably already thought of!).

1. I think everyone has a basic human right to an account where they can deposit $X and are guaranteed to get $X back. Sums so deposited cannot be invested because of the risks involved, thus such sums would effectively just be deposited at the central bank as reserves.

2. As soon as depositors want interest, they are trying to be commercial. The attitude of the state towards such people should be “OK, if you want to be commercial and try to earn interest, you’re on your own, just as you are on your own when trying to earn dividends from shares bought on the stock exchange. We, the state, make no guarantee you’ll get your money back.”

The latter “commercial” accounts COULD be similar to traditional deposit accounts: i.e. “we, the bank, are more or less promising you’ll get your money back with interest”. This might be OK if it is abundantly clear to depositors that there is no state guarantee. But the trouble is that banks would always try to hide the lack of state guarantee.

Thus the best solution is probably, 1, “no interest / state guaranteed accounts, and 2, mutuals. Nothing else allowed.

By: Isegoria

Isegoria — Thu, 19 Aug 2010 21:14:11 +0000

The problem is that a bank can’t promise to give everyone as much of their money as they want at any time along with interest from reinvesting those funds without creating the threat of a run on the bank. The problem goes away if either (a) the bank doesn’t reinvest the the funds and thus doesn’t offer interest, or (b) the bank doesn’t promise to give everyone as much of their money as they want at any time but instead allows them to sell their share of the reinvested funds. In reality, a bank would probably offer a bit of both: no-interest checking accounts with fees and money-market funds.

By: Ralph Musgrave

Ralph Musgrave — Thu, 19 Aug 2010 19:00:18 +0000

Isn’t a problem with that proposal that shares in a mutual is not what people with traditional deposits in a bank are looking for? What the latter want is to deposit $X and to be able to withdraw $X (possibly plus interest) at some future date. And that is a perfectly reasonable thing to want to do.

Strikes me that that desire or requirement can be met by trying to outlaw maturity transformation. It will never be possible to totally outlaw it. But murder and rape will never totally outlawed or prevented.