Does Interfluidity still not understand?
I like SRW and I like his site. He and I have emailed a number of times and I know he understands MMT, at least in part. He may not buy the whole program, but he's certainly familiar with it. So I'm not sure what to make of long discursions like this one and this one about the nature of banking when it's all pretty simple. I'll forgive certain commenters for talking about "maturity transformation" because they don't know better, but I'm not sure why Steve still entertains the concept. The very term suggests that a loan of one maturity (say, a deposit) is somehow transformed into a loan of a different maturity (say, a mortgage) when this simply is not how it works. Loans create deposits, deposits are not "transformed" into loans. A bank may actively manage its maturity exposure, but that is fundamentally a different thing. There is no "transformation". And then there's the long exegesis on how a bank loan is suddenly real money because even if the borrower defaults, the seller (say, of the car) remains whole:
No. Not at all. The transaction that has occurred is fully symmetrical. It is as accurate to say that the bank is in my debt as it is is to say that I am in debt to the bank. The most important thing one must understand about banking is that “money in the bank” also known as “deposits” are nothing more or less than bank IOUs. When a bank “makes a loan”, all it does is issue some IOUs to a borrower. The borrower, for her part, issues some IOUs to the bank, a promise to repay the loan. A “bank loan” is simply a liability swap: I promise something to you, you promise something of equal value to me. Neither party is in any meaningful sense a creditor or a borrower when a loan is initiated. Now suppose that after accepting a loan, I “make a purchase” from someone who happens to hold an account at my bank. That person supplies to me some real good or service. In exchange, I transfer to her my “deposits”, my IOUs from the bank. Suddenly, it is meaningful to talk about creditors and debtors. I am surely in somebody’s debt: someone has transferred a real resource to me, and I have done nothing for anyone but mess around with financial accounts. Conversely, the seller is surely a creditor: they have supplied a real service and are owed some real service in exchange. It would be natural to say, therefore, that the seller is the creditor and I, the purchaser, am the debtor, and the bank is just a facilitating intermediary. That is one perspective, a real resources perspective.I try to excerpt, but really, the whole thing continues in the same vein. The word "multifurcated" is used. The word "investor" never is. Here's a simpler description: When a bank makes a loan, it is making a credit decision. It creates the money out of thin air and credits the borrower, who usually turns around and buys something with that money, which the seller then deposits back in the bank (thus completing the circle of life). However, the borrower still holds a liability (the amounts owed) which mirrors a receivable that the bank holds. If the borrower pays back what he owes, everything is fine. If the borrower defaults, the receivable is written down, and the bank's equity is written down as well. The bank makes a credit decision when it makes the loan. Investors make an investment decision based on their assessment of the bank's wisdom in making credit decisions when they decide to invest in the bank. Since depositors are not and should not be making an investment or credit decision when they choose to save, they should not have those responsibilities put upon them (which happens to a limited degree today via FDIC insurance).