Thursday, September 25, 2008 47 Comments

Maturity transformation considered harmful: an unauthorized biography of the bank crisis

[Update: there is a good discussion of this post chez Arnold Kling.]

"You may not be interested in war," Trotsky once said, "but war is interested in you." Finance, too.

Perhaps you are under the impression that banking, accounting and economics are perfectly understood by the bankers, accountants and economists. Or did this week cure you of that? If it didn't, next week might. Generals, too, deserve deference for their understanding of war. But not unlimited deference.

I am not a banker, an accountant, or an economist. I am a computer programmer. My approach to financial engineering is to analyze it from the outside, taking nothing for granted, treating it as I would a new operating system or programming language.

Our financial system is not a new operating system. It is a very old operating system. Worse, there is only one of them: the whole world runs the Anglo-American banking system, more or less as described by Walter Bagehot in Lombard Street (1873). Lombard Street is our Windows. There is no Mac. There is no Linux. Our experts in finance are not experts in finance. They are experts in Lombard Street finance. Asking them to imagine an alternative is like asking a Windows programmer to imagine OS X - except that Windows isn't 314 years old.

(The closest alternative to Lombard Street finance is a relatively obscure branch of economics called the Austrian School. The basic problem with Austrian economics is that it has never been tried in practice, and it has not advanced much since Ludwig von Mises wrote Theory of Money and Credit in 1912. (A more readable modern text is Murray Rothbard's Mystery of Banking.) The discussion below is generally Austrian in method and theory, but simplified and generalized - and my conclusions are very different from, say, Ron Paul's.)

In any case, if you're running Windows and you suspect that you might want to "switch," a Windows expert is the last expert you want to ask. What needs to happen now, I feel, is that a very large number of very smart people who know nothing about finance need to do what I did, and try to figure the issue out from scratch. Hopefully they will not get the same results.

Because my results are... disturbing. If you suspect that they might be right, please try thinking through the problem for yourself. Let's go straight to the disturbing results, and then we'll try to justify them.

1. We do not have a free-market financial system.

2. We have never had a free-market financial system.

3. Leaving the financial system to "work things out on its own" will not produce a free-market financial system. It will produce a smoking heap of rubble.

4. Paulson's bailout is, if anything, far too weak. Our financial system is part of the government. The proper first step is to stop lying about this. This means nationalizing the banks. This is not an expansion of government, but a recognition of its actual size. It is not an expenditure, but a revision of accounting to reflect reality.

5. A free-market financial system would be way cool. More important, it would be extremely stable. But the only way to create one is to build it right from the start. If you have a car and you want a motorcycle, sell your car and buy a motorcycle. Don't decide to call your car a "four-wheeled motorcycle," and don't think unscrewing two of the wheels will solve the problem.

6. Therefore, the government should close down the financial system we have now and replace it with one that doesn't suck. What is the probability that this will happen? Zero. But at least you know.

These are the results. Now, the explanation.

When we ask: "what caused the bank crisis," we need to distinguish between proximate and ultimate causes. Our focus today will be on the ultimate cause. But first, let's get the proximate cause out of the way.

The proximate cause of the bank crisis is the gigantic vote-buying machine we know and love as the "Democratic Party." This gave us something called the Community Reinvestment Act, which compelled banks to steer over a trillion dollars in flagrantly bogus loans to the Democrats' electoral base. The scam is described, and its outcome predicted, in this article from 2000. Here is Barack Obama's lead economic advisor, endorsing it - in 2007. Doh.

If the gigantic protection racket known as the "Republican Party" had obstructed "diversity lending" in any way, that might be a reason to support them. They didn't, and it isn't. Indeed, Steve Sailer has uncovered a hilarious, and apparently improvised, W. speech endorsing the program:
All of us here in America should believe, and I think we do, that we should be, as I mentioned, a nation of owners. Owning something is freedom, as far as I'm concerned. It's part of a free society. And ownership of a home helps bring stability to neighborhoods. You own your home in a neighborhood, you have more interest in how your neighborhood feels, looks, whether it's safe or not. It brings pride to people, it's a part of an asset-based to society. It helps people build up their own individual portfolio, provides an opportunity, if need be, for a mom or a dad to leave something to their child. It's a part of -- it's of being a -- it's a part of -- an important part of America.

To open up the doors of homeownership there are some barriers, and I want to talk about four that need to be overcome. First, down payments. A lot of folks can't make a down payment. They may be qualified. They may desire to buy a home, but they don't have the money to make a down payment. I think if you were to talk to a lot of families that are desirous to have a home, they would tell you that the down payment is the hurdle that they can't cross. And one way to address that is to have the federal government participate.
Truer words were never spoken. The federal government is certainly participating now! So, we have our proximate cause: the Dempublicans. Or possibly the Republocrats. Do we care? Does anyone with any brains still believe in any of these swine?

The ultimate cause, however, is a matter of financial engineering. It has nothing at all to do with elections or politicians. Politics explains where the bad mortgages came from. Politics does not explain why they caused our financial system to lock up like a clogged fuel pump, or why no one can price or sell these instruments. Pricing dubious and complicated securities is what a financial system does. So why isn't it happening? What is the engineering mistake that caused the financial system to be so sensitive to this relatively minor piece of graft?

The engineering mistake is an accounting practice called maturity transformation. In the best CS tradition - I consider it harmful.

Maturity transformation might also be called monetary time travel. It is an accounting structure which permits a financial institution to pretend that it can teleport dinero from the future into the present. High-tech modern finance can do many cool things, but this is not one of them.

The price we pay for this illusion is a fundamental instability in the lending market. To most economists, this instability is a Diamond-Dybvig dual equilibrium. To Austrian economists, it's the Misesian theory of the business cycle. And in plain English, it's your common or garden bank run. The present crisis, which is by no means over, has many fascinating and devilish modern characteristics - but old Beelzebub is easily discerned beneath its raiment.

Modern computerized finance is especially susceptible to the bank-run bug, because in the last twenty years it has adopted an awesome array of incredibly beautiful and fragile modeling techniques. Unfortunately, all of these models assume a stable or single-equilibrium pricing environment. They do not allow for a phase change between dual equilibria. Doh!

Why has this mistake gone unrecognized? The basic problem with maturity transformation (MT) is that, while it is a bad accounting practice, it is not a new bad accounting practice. MT is not some horrendous monetary Guantanamo unleashed upon us by the corrupt Bushocracy. Nor is it a form of financial Bolshevism devised by the Mussulman Candidate, Barack Osama. Oh, no.

Maturity transformation is the heart and soul of the Anglo-American model of banking. Our current round of MT dates to the founding of the Bank of England in 1694. Lombard Street (which is still a good read) describes it in a nutshell. MT is inextricably woven into our political system, our accounting system, our profession of economics, even our Wikipedia. Despite the fact that it has been causing booms, busts, and crashes since Pennsylvania Avenue was a swamp.

Or so, at least, I assert. Obviously it's a somewhat dramatic assertion. But I think it's possible for you to use your own brain cells to understand why MT is harmful. You don't need to trust me, or anyone else. The problem is just not that hard to follow.

You may know maturity transformation as "fractional-reserve banking," which is one common case of the practice. A financial institution practices MT whenever it "borrows short and lends long," ie, promises to deliver money in the short term based on the fact that it is owed money in the long term. For example, in a classic fractional-reserve bank which takes checking deposits and uses them to fund mortgages, the bank's promises have a term of zero (your money is available whenever you want it), and its mortgages are repaid across, say, 30 years.

But few of us have operated a bank. I want to explain intuitively why maturity transformation is a basically corrupt practice. And for that, we'll need a more down-to-earth example.

Suppose you lend a friend of yours from work, Bobby, a thousand dollars. He agrees to give you the money back, plus fifty for interest, next week. The week is the term or maturity of the loan.

Bobby then lends your K to a friend of his, Dwight. Dwight is about to ride up to Humboldt to spend three boring weeks with his loser parents. Which will suck, but which will also enable him to score a pound of weed and hitch back with it. The weed can be moved for $1500 - but the three weeks is non-negotiable.

So the glitch arises when you buttonhole Bobby by the water fountain and mention that it's Monday. "Yeah, right," he says. "Man, hey, do you want to go in for another week? I'll give you another fifty. That's a good rate, man." This is, you agree, totally fine. You have just rolled over your loan to Bobby. Next week, you do it again. And the week after that, Dwight gets in. He pays Bobby $1300. And Bobby comes to you with $1150, still smelling faintly of Humboldt.

You have just had a successful customer experience with the Bank of Bobby and Dwight. You profited. Bobby profited. Dwight profited.

But is what Bobby did cool? Is it right? Did it display probity? We'd have to say - no.

At least, we would have to say this intuitively. We have not yet applied our logical faculties to the matter. We have just used the awful Bobby, and the still more horrendous Dwight, as propaganda props. Can we smear the noble art of banking with these dank characters?

The basic problem with this transaction is that when Bobby said he wanted to borrow a grand for a week, he was lying to you. Bobby is a user. He knew he could get away with stretching the loan from one week to three, and he did. If he'd just asked you for a three-week loan, everything would have been fair and square. But you might have said no.

What do you want to know when you lend someone money - whether it's Bobby, or Citigroup? You want to know that they'll pay you back. Or at least, that the probability of repayment is high enough to be justified by the interest rate on the loan.

To standardize this decision, our ancestors developed the art of accounting. Bobby, or Citigroup, opens the kimono and shows you two lists. One is the list of promises Bobby, or Citigroup, has made. For instance, Bobby has promised to give you $1050 in a week. This is sometimes known as a liability. The second list is the list of things Bobby, or Citigroup, owns - for instance, Dwight's promise to deliver $1300 in three weeks. This is an asset.

As a lender, what you want to know about Bobby or Citigroup is that they are solvent. In other words: Bobby has enough money to pay you back. Solvency is computed by subtracting liabilities from assets, the result being equity. For instance, if these are the only transactions on Bobby's balance sheet, and if we assume (a big if) that Dwight's promise is actually worth $1300, then Bobby's equity is positive $250, and he is solvent.

Note that when you consider solvency, you are not asking whether Bobby can pay you back. You are asking whether Bobby can pay all his creditors back. For instance, if Bobby has also borrowed $1000 from your officemate Dave, but lent it to his ex-girlfriend Angelique, who spent it all on meth, his equity is negative $750, and he is insolvent - or bankrupt. He can pay you or he can pay Dave, but he can't pay both of you.

There are two keys thing to remember about insolvency. One, it is a sort of event horizon; you cannot borrow yourself out of bankruptcy. No one has any good reason to lend to an insolvent party. Two, it is a collective decision: Bobby is either insolvent with respect to both you and Dave, or he is solvent with respect to both. He can either make good on his promises, or he can't.

But absent Angelique, when we use the solvency test to evaluate Bobby's business, it looks like a good one. Bobby is solvent. But he also had to lie to you to get the loan. Something is not quite right here.

If Bobby shows his balance sheet to a trusted third party, perhaps an auditor or regulator, the auditor will agree that Bobby is solvent. If you ask Bobby whether he can be trusted, he refers you to the auditor, who tells you that Bobby is solvent. But if you saw his actual balance sheet, you wouldn't do the deal. Our accounting model is simply not doing its job. Or is it?

Enough with Bobby. Let's look at an actual bank. FooBank, a classic fractional-reserve bank, has a billion dollars in demand deposits - that is, liabilities of zero maturity, which are continuously rolled over when its depositors fail to withdraw them from the ATM. It has $50 million in the vault, and $1.1 billion in fixed-rate 30-year mortgages, giving it equity of $150 million.

Note that $1.1 billion is not the total amount of money owed on FooBank's mortgages. It is the current market price of the mortgages. Ie: if FooBank sold the mortgages to some other financial institution, it could get $1.1 billion for them. (Because interest rates are always positive, that means the total payments over 30 years will be much more - let's say, $1.5 billion.)

So our question is: should you put your money in FooBank? If you give FooBank a demand deposit, can you be sure that it will be there when you demand it at the ATM?

Our first answer is: yes. Whatever your deposit is, it's a lot less than $50 million.

Our second answer is: no. Because FooBank, like Bobby, is a maturity transformer. It owes $1B, now. It expects to receive $1.5B - over the next thirty years. Dwight is sure taking a long time up in Humboldt! FooBank has only $50 million in the vault to pay its $1B in demand deposits. If more than 5% of its customers demand the payments they are contractually owed, FooBank is screwed. If you are not among the first 5%, you're screwed too. What's FooBank going to do? Will the ATM print out a message telling you to go up to Humboldt, and find Dwight?

Remember, back when we were considering Bobby's solvency, we established what you want to know as a lender: that the borrower (Bobby) will be able to fulfill all his promises, not just yours. There is no such thing as selective default. And there is absolutely no reason to assume that your fellow depositors won't all show up at the same time.

When you don't turn up and withdraw your demand deposit, you are effectively rolling over a loan to the bank. And from the bank's perspective, there is no difference between rolling over a loan and finding a new lender. So FooBank is staking its undefeated record in promise fulfillment, which might be impressive in a Bobby but is pretty much required in a bank, on paying back its old loans by finding new lenders. Um... where have I heard that before?

Our third answer is: yes. Because we've forgotten something, which is that FooBank is solvent. It may not have $1 billion in the vault. But it can raise $1 billion - quite easily, by selling its $1.1 billion worth of mortgages.

In a modern digital market, this can be accomplished on the spot. It is a simple matter of software. As customers line up at FooBank's ATM, red flags go up, mortgages are sold - presumably to FooBank's competitor, BarBank - and trucks full of cash from BarBank arrive. At the end of the day, FooBank has no deposits, and $150 million in assets. It returns these to its stockholders and closes down. Call it an immaculate bank run.

This is a worst-case scenario. It won't happen. And the fact that, in this worst-case scenario, everyone gets their money back, is what makes it not happen - because the motivation for a bank run is that, in a bank run, not everyone will get their money back. Problem solved.

Our fourth answer is: no. Because we've forgotten something else, which is that maturity transformation doesn't actually work. At least not in a physical, literal sense. You cannot actually teleport money from the future to the present. FooBank can't - and BarBank can't.

To understand the problem here, let's think a little bit about what makes FooBank's mortgages "worth" $1.1 billion. We tend to use words like "worth" and "value" as if they represented absolute, objective, physical characteristics. A kilogram of iron will always weigh a kilogram. But what makes a package of mortgages "worth" $1.1 billion? Merely the fact that if you put it on eBay, the high bid will be $1.1 billion.

This, obviously, depends on the bidders. Mortgages, like everything else, are priced by supply and demand. Even if we hold the demand for mortgages constant, pushing $1.1 billion of them onto the market in one day is likely to depress the market price. And why should the demand be constant? We certainly have no basis for this assumption. Let's poke a little harder on this one.

First, we need to think a little harder about interest rates. We are used to thinking of interest rates from the customer's perspective, in which they are a return on investment. From a banker's perspective, however, an interest rate is the price of future money in present money. For example, a 10% annual interest rate means that I can buy $110 of 2009 money for $100 in 2008 money. This is an exchange rate, just like the exchange rate between dollars and euros.

To know the correct price of a future payment - such as the payments on FooBank's mortgages - we need to know two variables: the probability of default, and the interest rate. Let's assume (this assumption is not valid in reality, as we'll see, but breaking it will only make the problem worse) that the bank run has no effect on the probability of default. Let's assume, also, that FooBank's mortgages are perfectly good and have a minimal default probability.

But the interest rate for our 30-year mortgages is set by supply and demand. Clearly, because we are in a maturity-transforming banking system, a considerable quantity of that demand comes from maturity transformers such as FooBank. And ultimately from its depositors. Ie: maturity transformation in the mortgage market, by magically transmuting demand for zero-term deposits (money right now) into demand for mortgages (money 30 years from now), has vastly lowered 30-year interest rates.

So when FooBank's depositors pull their money out, mortgages go on the market and mortgage interest rates go up. This increases 30-year interest rates across the market - lowering the price of mortgages. That $1.1 billion isn't $1.1 billion anymore.

Worse, we have arbitrarily assumed that the run does not extend to BarBank. In fact, we have assumed that BarBank, in some way, pulls in $1.1 billion of new deposits - because that cash in those trucks needs to come from somewhere. But, since our bank run is not the result of any problem restricted to FooBank (whose mortgages are good), it can only be a systemic run. That is, all depositors everywhere realize that the banks simply do not have the present money to repay them - and their so-called "solvency" is a result of long-term interest rates that do not reflect the actual supply and demand for 30-year money.

Thus, the entire banking system is certain to implode. And implode instantly. The result: a landscape of shattered banks, people who have lost their deposits, and very, very high (but perfectly market-determined) interest rates. Moreover, housing prices will decline - because they, too, are set by supply and demand, and high interest rates mean expensive mortgages.

Another way to think of this is to realize that the Diamond-Dybvig model (see the original paper, here) is not quite right - there is no "good equilibrium." The so-called equilibrium in which depositors leave their money in the bank is unstable. You can see this by observing that the probability of a bank run is never 0, and the value of a deposited dollar cannot exceed the value of a non-deposited dollar - ie, the exchange rate between a dollar in the bank and a dollar under the mattress cannot exceed 1:1. But since a bank run can occur, a dollar in the bank must be worth slightly less than a dollar under the mattress - to compensate for the probability of a bank run. Eg, if the probability of the run is 0.001, and the bank returns only 50 cents on the dollar after a run, the value of a dollar in the bank is 0.9995 dollars in cash. This disparity creates withdrawal pressure, which is a feedback loop, and the run happens.

If this hurts your head, just think of the maturity-transforming banking system - FooBank, BarBank, MooBank, and all their competitors - as a single bank. This system has, like Bobby, made promises that it cannot physically fulfill, because physically fulfilling them would require actual, physical time travel. There's simply no way this can be good accounting.

Essentially, what we're looking at is the collapse of a market-manipulation scheme. The banks have been collaboratively bidding up 30-year money by buying it with 0-year money that belongs to someone else. The situation would be no different if they were bidding up, say, copper, or Honus Wagner baseball cards. They have created an artificial pricing environment, based solely on the carelessness of their depositors in rolling over loans. Once the scheme is exposed, the price of Honus Wagner cards crashes, the banks have spent the depositors' money on goods whose price has considerably declined, and massive insolvency is revealed.

It helps to understand the use and misuse of the word liquidity in this environment. The proper and original meaning of liquidity is the existence of a market with instant trading and small bid-ask spreads, such as the stock market. For example, a house is not a liquid asset in this sense, because setting up a housing sale is very difficult and expensive.

But liquidity has come to mean something else: the presence of maturity-transformed demand for long-term assets. As we've seen, the price of 30-year money in a market where banks can balance 0-year liabilities with 30-year assets is one thing. The price of 30-year money in a market in which all the demand for 30-year mortgages comes from 30-year lenders (for example, a 30-year CD - an instrument which does not even exist at present) is very different.

Thus, when a maturity transformation scheme breaks down, the market is said to be illiquid. In fact it is perfectly liquid in the first, original sense of the word. It is just revealing the actual market price of 30-year money as set by 30-year supply and demand - an interest rate so horrifyingly high it makes any 30-year mortgage at 6% more or less worthless. (Actually, the "fire-sale" market for mortgages today is still well above this price - it is set more by speculation that the MT switch will flip back on, I think.) This phenomenon appears to resemble genuine liquidity, because assets are "hard to sell" - but they are hard to sell only because those who now hold them have them on their books well above the market price, and don't want to sell for less.

Professor Bernanke's recent mention of "hold-to-maturity" price reflects this intentional misunderstanding. Economist Willem Buiter clarifies:
The MMLR [lender of last resort] supports market prices when either there is no market price or when there is a large gap between the actual market price of the asset, which is a fire-sale price resulting from a systemic lack of cash in the market, and the fair or fundamental value of the asset – the present discounted value of its future expected cash flows, discounted at the discount rate that would be used by a risk-neutral, non-liquidity-constrained economic agent (e.g. the government).
Ie: the long-term interest rate on Treasuries. Which is still set by maturity-transformed demand (especially, via the central banks of China and the Gulf states, which back their currencies with Treasuries).

Professor Buiter's definition of this rate as "fair" reflects the institutional assumption of the economics profession that MT is a good, clean, and healthy thing. In reality, it is concealing the most important price signal in the world: the present demand for future money. MT adds present demand for present money into this market, utterly and irrevocably jamming the signal.

The basic problem with the toxic assets that are clogging up the banking system today is that there is no market mechanism that can reveal Professor Buiter's "fair value." Any such mechanism needs to solve for two variables at once: it needs to create a market in toxic mortgages in which the players are banks paying with maturity-transformed money. Otherwise, the default risk of the loans cannot be calculated by comparing their price with the price of Treasuries. The risk-free interest rate in a market in which MT has broken down is much higher than the risk-free Treasury rate. This rate is unknowable. And you can calculate default risk from price only if you know it.

Moreover, banks have no incentive to buy these toxic mortgages, turning MT back on in the market - at least not until the price hits its rock-bottom point, at which MT is completely off and 30-year supply is met by 30-year demand. Nor is there any way to see when this point has been hit, because there is no genuine maturity-matched market, and there are plenty of speculators betting on some kind of intervention. And the implied interest rate at this rock bottom is so high that the houses which collateralize the mortgages may be almost worthless.

And our fifth - and final - answer is: yes. Because FooBank, BarBank, and MooBank are all FDIC-insured.

Actually, this is not even quite right. At least according to this story, FDIC is basically empty. It had only $45 billion last time it reported, and it surely has a lot less now. This to "insure" something like $4 trillion in deposits. You might as well defuse a car bomb by wrapping it in toilet paper. FDIC "works" because it is backed by the Treasury, which of course has the Fed's "technology, called a printing press" - ie, Ben's helicopters - behind it.

In other words, when you make a bank deposit, you have acquired not one but two securities. One is a promise from FooBank to pay you on demand. The other is a promise from USG to pay you if FooBank doesn't. Because the promise is denominated in dollars, USG can print dollars, and USG has no reason to welsh on this promise, the dollar on deposit is truly worth $1. Not $0.9997, $1.

Note that we have just discovered the missing dollars from last week's post - or some of them, anyway. These dollars are contingent - they only come into existence in special cases, such as a bank run - and they are informal. But as informal, contingent dollars, they exist nonetheless. If the Fed prints money to bail out FDIC, it is a bailout - just like Paulson's bailout, the Fannie and Freddie bailout, the AIG bailout, etc. There is no law requiring bailouts. But they seem to happen anyway.

For that matter, Treasury obligations are risk-free for exactly the same reason. This is how the US can run a $10 trillion risk-free debt in a world with only 825 billion actual dollars. It is simply assumed that well before Treasury would default, the "technology, called a printing press," would be used to bail it out. There is no formal guarantee of this. There is simply every incentive to do it, and no incentive not to do it.

This whole beast is an incredibly cumbersome and bizarre accounting structure. And it simply cannot be understood without reference to these kinds of informal obligations. In accounting, the word "informal" is essentially equivalent to "criminal." Simply put: the whole thing stinks.

Moreover, we can construct a formalized equivalent that has the same outcome, uses maturity-matched accounting, and is completely unacceptable from a political standpoint. In fact, it's more than unacceptable. It's ridiculous.

Consider FooBank, with its FDIC guarantee in place. The infinite printing press guarantees FooBank's liabilities to its depositors. This leaves FooBank free to use the depositors' money to buy 30-year mortgages, while assuring them that they can redeem at any time.

A much simpler approach is for FooBank to simply store the deposits in its vaults, and have FDIC make the mortgage loans - in a quantity equalling FooBank's deposits. This produces: exactly the same safety for FooBank's depositors; exactly the same demand for mortgages; and exactly the same risks for FDIC (which is, of course, exposed to the mortgage risk).

And it's also utterly ridiculous. Basically, it means that mortgages are cheap because Uncle Sam is printing money and lending it. When you want a mortgage, you apply to the government. Moreover, the connection to FooBank's deposits is utterly unnecessary. There is no reason that FDIC has to restrict its mortgage issuance to FooBank's deposit base, tying it to the irrelevant convenience question of whether depositors prefer their money in a vault or under the mattress.

What this thought-experiment tells you is that, if you believe in maturity transformation, you believe it's good public policy for the government to print money and lend it. Homeownership, after all, is important! President Bush says so, so it must be true. This raises the question of why, if it's good for Uncle Sam to engage in this practice, it's not good for everyone. Why not license private entities to engage in the essential public service of counterfeit lending? The counterfeit spender drives up prices and is bad for everyone, but the counterfeit lender creates a liability for every dollar emitted... anyway. We are in the realm of absurdity.

We are now in a position to understand the crisis as a whole. What happened is that a shadow banking system appeared, which performed maturity transformation without formal FDIC backing. Participants in this market assumed that large or "too-big-to-fail" institutions, such as Lehman, Bear, AIG, etc, were effectively recipients of an informal Federal guarantee, just like FDIC itself, the traditional banks, Fannie and Freddie, etc. But they had reached the edges of informality and walked off the cliff into delusion.

Furthermore, the financial models that players in the shadow-banking market used simply did not incorporate the possibility of a maturity-transformation crisis. They lived in a world of Lombard Street accounting, in which MT was just normal. The fact that MT only works with a lender of last resort who can print money (or, under the "classical gold standard," compel market participants to accept paper at par with gold, as the Bank of England did during the Napoleonic wars), did not exactly bring itself to their attention. Nor did the fact that they were treating private corporations as perfectly-insured counterparties.

Essentially, Wall Street (a) thought it was a free market, and (b) assumed that MT in a free market just works. Both of these assumptions were wrong. The financial system was both free and protected, but the part that was free was not protected, and the part that was protected was not free. And the border between the two was completely informal, and was set in an ad-hoc, after-the-fact way by panicked bureaucrats in Washington.

We are now in a position to consider solutions.

Our first solution is a free-market solution. In the free-market solution, Washington renounces all bailouts, guarantees, nationalizations, etc. There is an easy way to do this: break the Fed's printing press. Pass a constitutional amendment limiting the number of dollars extant to the number of actual dollars in the world: M0, 825 billion. That's about $2750 for every American - although not all of these dollars, of course, are in America.

Result: the mother of all bank runs. All bank deposits are vaporized. The assets backing them become nearly worthless. Have fun paying off that $300,000 mortgage, with your $2750. Even Treasury obligations trade at pennies on the dollar - have fun paying off that $10T national debt, in a world with only 825 billion dollars.

The good news: hyperdeflation. If you have a dollar, an actual physical greenback, you can eat for a day. If you have $20, you're set for the month. A benjamin is unimaginable wealth. Gas? Five cents a gallon. Gold? Worthless. Ammo? Priceless. Basically, we're looking at Mad Max Beyond Thunderdome, with 1915 prices. I'm sure this would make some people very happy. I am not one of them.

Our second solution is the Paulson plan - with its wonderful acronym, TARP. TARP is effectively a new bank with no liabilities, $700 billion of equity (owned by USG), and a mission to buy mortgages.

I am not going to go out on a limb and say the Paulson plan won't work. But I will be surprised if it works. Basically, its goal is to pump enough money into the market for "troubled" assets - assets in which a bank run has occurred, and MT has broken down - to pull them out of the "troubled" category.

My suspicion is that the result will be just one more bank which holds troubled assets, held on the books above their market price. So what? Why should this price be the "official" price? Add this to the fact that the troubled assets are wildly heterogeneous - every mortgage-backed security is different. Just because TARP overpays for one, doesn't mean everyone should overpay for any. And they won't.

And our third solution is Plan Moldbug - nationalize all banks and other maturity transformers, exchanging their shares for cash at the present market price, acquiring their assets and accepting their liabilities. Consolidate the entire financial system onto USG's balance sheet.

While we're at it, merge the Fed, Treasury, Social Security and Medicare into one financial entity. Clean up the whole maze of interlocking quasi-corporations. The US Government is one operation. It should have one balance sheet.

And yes, the banking system is part of it. Under the pretext of "regulation," the banking system is already federally managed. Even its executive pay is apparently about to be set by Congress. But most important, the banking system is part of USG because USG has already chosen to accept its liabilities - by guaranteeing them. When A guarantees B's liabilities, B needs to be on A's balance sheet. This is accounting 101, folks.

This unity is even recognized in the conventional nomenclature for money supplies; M0 is the supply of zero-term Fed liabilities (ie, Federal Reserve Notes, ie, dollars); M1 is the supply of zero-term bank liabilities. The exchange rate between an M0 dollar and an M1 dollar is 1:1 and guaranteed to stay that way. So in what way are they different things?

As we discussed last week, FRNs are more like equity than debt - they are not promises to pay anything. And if an FRN is a share, a Treasury bill is a restricted share. Thus, under Plan Moldbug, USG has a single balance sheet with no debt. It can, of course, continue its present practice of diluting its equity (selling Treasuries, printing FRNs, etc) to pay off its operating deficits. But it would be better advised to issue a large pool of shares to itself, to assist it in phasing out this pernicious habit.

Also, Plan Moldbug has a critical fairness advantage: it is portfolio-neutral. The day after this action, everyone's portfolio statement will show exactly the same number. If (God forbid) you hold bank shares, those shares will be converted to cash, just as if the bank had been acquired by another bank. If you hold mortgage-backed securities - but who holds mortgage-backed securities? Not anyone I know. And if you pay a mortgage, in all probability you are now paying it to the government. Do you care?

This is an important point, because Plan Moldbug involves a gigantic increase in M0. M0 is the sum of Fed liabilities. By consolidating the balance sheet, we are moving bank liabilities - the rest of the M's, and beyond - into this category. In any naive analysis, this seems "inflationary." But naive analysis neglects the actual relationship between money supply and prices. Prices increase when people have more money, ceteris paribus, to spend on the same goods. If the change is portfolio-neutral, by definition it cannot affect prices. In reality, all we are doing is recognizing the actual supply of dollars, which is much greater than $2750 per American.

Naturally, the point of any such nationalization is not to have to do it again. Applying to the government for loans is a little Soviet for my taste. Our present system, in which Fannie and Freddie more or less are the government, is already a little Soviet.

The end goal is to phase out this lending-counterfeiter business, and construct a new financial system - the motorcycle - in which lending is really, truly private, and financial intermediaries match their maturities. If Bobby needs money for three weeks, he asks you for a three-week loan. He does not ask you for a one-week loan and then get a surreptitious, covert, informal three-week loan from the Fed's "technology, called a printing press."

In any such financial system, we would see the true yield curve, the graph of interest rates at every maturity, uncontaminated by maturity mismatching. My suspicion is that at least at first, long-term rates would be quite high. Which means lower house prices. In the spirit of portfolio neutrality, USG might want to print some more money and kick it back to homeowners, such as, of course, myself...

But at this point we are just fantasizing, because none of this is going to happen. If the American public balks at "King Henry" (I believe one poll showed 7% support for the feeble TARP) - they'll have none of Emperor Moldbug. If printing a mere $700B turns their stomach (the "cost to the taxpayer" - of course, no one will raise taxes to "pay" for this use of the "technology, called a printing press"), moving a few T from M1, M2 and M3 to M0 is a nonstarter.

What we're seeing here is a failure of democracy. Americans have a certain picture of their financial system. They believe that a dollar is, in some way, an asset like gold that cannot be printed at will. They believe that banks are free-market corporations, not branded branches of the State. They believe in regulation, but they don't believe in socialism. And so on.

Any politically realistic policy has to be framed in these terms, which are not realistic. The result: stalemate, ineffectuality, drift, and disaster. In other words: EP1C FA1L. I don't know what's going to happen, but I know it's not going to be good.


Blogger TGGP said...

Bob Higgs says we're not really clogged.

Russ Roberts grudgingly concedes the community reinvestment act did not cause the meltdown. Steve Sailer only claims that kind of crap contributed, not that it was the major factor. Lawrence Auster assigns liberals between 51 and 80 percent of the blame.

From the late 17th century to now we've seen the wealthiest societies in history, operating under that horrible banking system. Perhaps it's inferior to a free-market (that would be my guess) but even now we're not in the Soviet Union (another grand plan based on untried ideas that replaced an admittedly imperfect system and engaged in extensive nationalization).

September 26, 2008 at 1:54 AM  
Anonymous dearieme said...

Your link showed that William Paterson founded the Bank of England in 1694. In 1695 he played a large role in the founding of the Bank of Scotland. Last week, the Bank of Scotland effectively ceased to be. It is no more. It has joined the choir celestial. Ant it was about a century older than the USA.

September 26, 2008 at 2:53 AM  
Anonymous Anonymous said...

Great essay! Standing ovation.

September 26, 2008 at 2:54 AM  
Blogger ChrisPhoenix said...

You made one incorrect assertion: that a dollar under the mattress is worth $1, while a dollar in the bank is worth less.

In fact, as the ladybug knows, that dollar under the mattress may cease to be yours at any time, with some significantly nonzero probability.

This is a major reason why banks came into existence in the first place: their vaults are more fireproof, theftproof, etc. than your mattress.

This does not appear to invalidate most parts of your argument. What it does appear to do is reestablish the first point of the equilibrium, the one you said was missing, the one that keeps bank runs from happening today.

So, as might be predicted intuitively, bank runs will happen when people start to think that their money is actually safer under a mattress than in a bank.

It may be interesting to speculate on how far off that point is, and what manipulations of public perception will affect it. These are not, of course, economic speculations, but rather social and political speculations.

We know that the mere rumor of a shortage in, say, toilet paper - in fact, a comedian mentioning a fictitious shortage as part of a comedy routine - can create an actual run on toilet paper sufficient to empty store shelves over a wide area.

There's another question. How much will Americans actually want to pull out of their banks to hedge against disaster? For most of us - those who haven't already moved to Montana and built bunkers - it won't be the entire contents of our savings account. Is it possible that it'll be less than $2750?

Even if it is more than M0 (or, more precisely, the fraction of M0 that's not overseas or filling the various cash-transaction pipelines), it is surely a small fraction of M1. If the government physically printed enough dollars to make moderately paranoid Americans feel secure... that would be, what, a 2% increase in inflation? 5%?

Which brings me to another problem in your analysis. It assumes that every actor has the same incentives to launch a run on the bank. This is not the case. China, for example, knows very well that it can't launch a run on the bank, because it alone would bankrupt the bank and see its nominal assets go poof.

Big financial institutions in the US know that, while they could launch a run on the bank, they could also stay in the old boy's network and wait for a bailout of one form or another. No one likes a party pooper, but people who maintain a polite fiction are often treated very well.

So there's some threshold of assets above which people will not make a run on the bank... and probably will not even join such a run if it starts.

With 90% of the wealth of the country held by some amazingly small percentage of people, this means that our estimate of the actual cash the banks may have to come up with can be reduced by an order of magnitude, at least. Now we're down to, what, 0.5% extra inflation?

Granted, none of this is good accounting. But as you note, we're not really a free market anyway, and banks aren't really banks. An accounting-based criticism of a non-accounting system will be different from reality. It may be more pessimistic or less pessimistic. I don't know for sure, but I think you are too pessimistic this time.

September 26, 2008 at 5:07 AM  
Blogger Leonard said...

This is for MM, if he reads his comments any more, or any of you other financial wizards reading.

I don't understand the claim that maturity transformation causes long-term interest rates to be far less than they would be in a free market. I.e., MM's assertion that "the actual market price of 30-year money as set by 30-year supply and demand [is] an interest rate so horrifyingly high it makes any 30-year mortgage at 6% more or less worthless."

Of course I grasp, and agree with, MM's assertion that maturity transformation is shady.

But let's consider a hypothetical free market system. Initially, perhaps, there's nobody willing to buy 30 year CDs. So the mortgage market goes nuts, and long-term rates explode to 100% or whatever. But then someone invents the idea of issuing 30-year bonds, lending the money for mortgages, and making a bundle. So, CDs essentially cease to exist (except perhaps for short terms). They are replaced with bonds, although they may well call them "CDs" since that's already a familiar term to the lumpeninvestorate.

So what's the difference from the POV of a homebuyer? I don't think there is much -- they get a loan, at a rate. Presumably this rate is somewhat higher than it is now, but I don't see why it would be that much higher. Foreclosure risk is the same, lending supply and demand are more or less the same; the only thing that differs is that default risk is clearly defined, as versus being informal, including possibly being Uncle Sam's.

What's the difference for a small depositor? That they are now exposed to market fluctuation of bond prices. To get a long-term rate of interest, you buy a bond (or a fraction of one). But you're not locked in -- it's a bond; you can sell it at any time in a highly liquid market for bonds.

It seems to me that you end up with just about the same long-term interest rates as you do now. Yes, the risk increases a little for long term "deposits" (bond-owners). Depositors would probably want to get a little higher rate, to compensate for risk. But housing is a very solid market; certainly it seems far more likely to me that, for example, housing will still exist and people will be able to pay mortgages in 30 years, as versus that IBM will still exist and be able to pay off its bonds.

So, what am I missing here?

And as a followup: if there is not that much mismatch between a real, free market 30-year rate and the 6% (or whatever) that current mortgages have... is the current crisis really as bad as MM suggests?

September 26, 2008 at 8:15 AM  
Anonymous Anonymous said...

I previously posted much of the following, as Dirtyrottenvarmint, in the comments here:

Since neither Megan nor Mencius is paying me for my comments, I don't have a problem cross-posting. If either of them do, they are welcome to fight it out. In fact, there is a lot of interesting discussion of financial shenanigans on both blogs, and I for one would encourage Mencius and Megan to engage in some intellectual mudwrestling.

Mencius adds at least one point of interest that I did not address in my comment: the accusation that at least some of the maturity transformation we've seen has been fraudulent. If Bobby borrows money for a week and doesn't tell you that he is lending your money to Dwight and won't be able to get it back for 3 weeks, this is fraud. Fraud is bad. The badness of fraud has nothing to do with maturity transformation.

In terms of a workable plan to minimize the damage from the financial crisis: the crisis is the dearth of capital for investment. Yes, there are "toxic assets" blocking the pipeline. The crisis is not due to the presence of toxic assets, it is due to the lack of pipe capacity. True, the toxic assets are blocking the pipe. It could be difficult to remove the toxic assets. However, we can easily create more capacity by making the pipe wider. In banking terms, we can do this be relaxing reserve capital requirements. Yes, this involves some increase in risk that the banks will become insolvent. As Mencius so rightly points out, this is already a risk. Fraudulently claiming that there is no risk is bad. Honestly and openly acknowledging risk and letting people make the decision whether to accept that risk or not, is good. The fact that fraudulent risk is bad does not mean that all risk is bad. Yes, the toxic assets will still be floating around for some time in the now roomier pipe. Shit happens. Mencius' plan to nationalize the banking system will not do anything at all to solve the capacity problem, unless the newly-nationalized system reduces capital requirements. I agree with Mencius that the system is largely nationalized already. Probably calling a spade a spade is more honest, and in general I'm in favor of honesty. However, if you have a spade that you have been calling an entrenching tool, and you decide to be honest and call it a spade, this name change does not make your spade into a bulldozer.

What follows is my comment in response to a somewhat similar topic, again, cross-posted from Megan's blog. Note that Megan uses the term "maturity mismatching" instead of "maturity transformation". Mammoth is mammoth.

What I see on this comment board is a lot of confusion regarding the difference between fractional reserve banking and fiat currency.
Human beings have been engaging in "maturity mismatching" since some lamed geezer began chipping stone tools for the fitter members of the tribe in exchange for a share of mammoth. It takes a very long time and a lot of practice to become truly proficient at flintknapping. A mammoth hunt may have taken several days but certainly not so long as learning how to make stone tools consistently and well. So the mammoth hunters were engaged in a short-term investment (time spent hunting) that entailed some risk (they could be trampled and die) some of the proceeds of which (mammoth meat) was used to invest in a longer-term project (feeding the flintknapper while he makes stone tools) with its own level of risk (he could be eaten by a sabertooth, the loss of his help hunting could result in the whole tribe starving and leaving behind a number of unfinished stone tools, he could fail to figure out how to make the tools efficiently and well...) with a potentially greater long-term payoff (better tools with which to bring back a lot more mammoth meat). Yes, it's possible the flintknapper took his turn hunting as well (though one might argue this was an unacceptable risk) but the two roles, hunter and flintknapper, are separate and distinct and that is all we really care about.
That's "maturity mismatching" in a nutshell. Even non-human primates engage in this sort of activity, just not with flintknapping. If you think this is a terrible, bad idea that is doomed to fail, I invite you to go play with your unevolved, single-celled, pond-scum brethren where you belong.
Fiat currency, on the other hand. With fiat currency, the entity which makes the fiat (let's call this a "government") can arbitrarily change the supply of currency. We need to understand "currency" as a symbol - a medium of exchange and naturally outgrowth of the barter system. As one commenter rightly pointed out, Megan, you cannot "make money work for you" - people work, not money. Money is just a unit of barter that is hopefully easy to carry around in your pocket and doesn't spoil.
Within a fiat currency regime, the government (or those with a strong interest and the means of putting pressure on the government) looks at the maturity mismatching phenomenon and decides that it's simply terrible that the tribe has to invest so much effort in obtaining mammoth meat to feed one flintknapper when, really, there is a pretty big risk to the tribe that the old geezer will get sick next winter and die, taking all of his half-learned knowledge and practice with him to the happy hunting grounds beyond. It would in fact be a wonderful thing if everyone in the tribe could be a flintknapper. Success would then be assured, and everyone could have nice stone tools. The government in its power and wisdom then causes freshly-cooked mammoth meat to magically appear right outside the tribe's camp, every day. (Mammoth meat is neither particularly portable nor particularly immune to spoilage, but it works for our purposes.) No longer do the hunters need to risk their lives to hunt mammoths! Everyone sits around the cave and learns to make stone tools. There is so much mammoth meat that the tribe grows in size, more and more join it and new babies are born since there is plenty of food for all. It takes more and more mammoth meat to feed everyone so they can continue to make wonderful stone tools, but that is all right because "the government" continues to provide mammoth manna. The "ivory age" of growth and prosperity is talked of reverently by all.
Then one day there is no mammoth meat. "Where is our meat?" ask the tribespeople.
"There is no more meat," says the government, "the mammoths are all dead and there is no more to be had. Sorry. Actually, we fed a lot of mammoth meat to the sabertooths to keep them off your backs. We could bring the sabertooths over and you can ask them if you can climb into their stomachs and see if there is any meat left in there. In hindsight maybe we should have encouraged you to use something of relatively fixed quantity, like this shiny stuff called gold, as a medium of exchange, instead of mammoth meat that we magically created out of nothing. Oops."
So all the people starve and die, leaving their nice stone tools about unused, and the dodos live happily ever after.
Fractional reserve banking GOOD. Fiat currency BAD.
End of lesson.

-- by Dirtyrottenvarmint

September 26, 2008 at 1:22 PM  
Blogger The Snob said...

Nonsense. As tggp says, for a fatally-flawed system, fractional-reserve banking has brought us awfully far over the long haul.

Part of being a conservative is demanding a high standard of proof for those who wish to indict a system that has, historically, served us well. You propose replacing this with a system which is radically different and which you confess has never been even remotely tried. Perhaps you have something more to offer those of us who would not take this particularly seriously?

September 26, 2008 at 1:27 PM  
Anonymous Libra said...


What you describe is not maturity mismatching. It's just an ordinary loan. The hunters continuously loan food, and expect to get repaid in a year when the toolmaker is done creating his tools. It's only maturity mismatching if the loan from the hunters to the toolmaker are callable at any time. The hunter has the expectation that if he needs the money back in a month, he can go by the toolmaker's house and just get it back. But in reality, he finds the toolmaker won't be able to pay back for another eleven months. Then you have your crisis.

September 26, 2008 at 1:54 PM  
Blogger Reginald said...

Critical Analysis of 1st Solution:
“…The good news: hyperdeflation. If you have a dollar, an actual physical greenback, you can eat for a day. If you have $20, you're set for the month. A benjamin is unimaginable wealth. Gas? Five cents a gallon. Gold? Worthless. Ammo? Priceless. Basically, we're looking at Mad Max Beyond Thunderdome, with 1915 prices. I'm sure this would make some people very happy. I am not one of them.”

The statement in regards to greenbacks and gold are incorrect. There are two possible assumptions to be made under the 1st solution: USG still exist, or USG no longer exist. Regardless of the choice, there must be a genuine demand for a certain object to become money. Gold became money because of the genuine demand for the metal, which will exist if human beings still inhabit the planet. However, greenbacks became money because of the genuine demand to pay taxes to the State and fiat decree. If that State were to collapse the demand under taxation and fiat disappears, and greenbacks would return to their genuine demand as mere scrap paper.

Assuming the USG still exist under the 1st solution, the value of greenbacks are likely still worthless. USG has to enforce taxation, and generate genuine demand to hold greenbacks. At the same time holders of USG bonds (e.g. treasuries) would sell their securities because USG would surely default on its debts. As the future income stream of greenbacks (e.g. treasuries) are sold, this would negatively impact the present value of the same greenbacks and raise interest rates. Lastly, individuals still view gold as money. As empirical evidence, during the Great Depression Americans began to abandon greenbacks for gold (see Murray Rothbard’s The Great Depression) as deflation soon transitioned into inflation as the Federal Reserve’s money printing overcame the contraction in bank credit. In order to prevent its likely result, former President Roosevelt seized the majority of gold held by the public. This scenario would likely repeat itself at a faster pace thanks to advances in telecommunications.

Were the USG to collapse under the 1st solution, the value of greenbacks would be worthless. Without USG enforcing taxation the only genuine demand for greenback reverts to mere scrap paper. Within weeks foreign currency (assuming foreign States are still enforcing taxation of their own citizens in foreign currency) and precious metals would constitute money.

In the end, the only form of money that would maintain its value would be gold. All of this assumes civilization moves beyond mere barter. If barter were to return all forms of money would vanish, but precious metals would still have genuine demand (e.g. value) as a metal.

September 26, 2008 at 1:58 PM  
Anonymous masaponax said...

I always suspected that this 'fractional reserve' business was wicked, evil and sinful. It is the beginning of the moral decadence and rot that has infected Western Civilization since the Abandoment of God began in earnest.
Nothing is real or solid in the mind of the sybarite and sophisitcate. Everything can be temporalized. Think of the sodomite John Meynard Keynes. Think of the decadent 'deconstructionist' post-moderns, inisiting that nothing is real, that there are no actual physical limits on anything.. that everything is a kind of intellectual maturity transformation.
I cannot wait till the collapse comes and sacred order of the Gold Standard returns. I cannot wait until shopping malls are burned and we will once again eat hard-tack on pewter plates, and practice the august virtues of thrift and chastity.

September 26, 2008 at 2:23 PM  
Anonymous Anonymous said...

Your idea is a good one, but is not really new. Maurice Allais, an Economy Nobel Prize, formulated it - long with others - somehow 40-50 years ago. Regarding maturity mismatch, he said :
"In essence, the present creation of money, out of nothing by the banking system, is similar - I do not hesitate to say it in order to make people clearly realize what is at stake here - to the creation of money by counterfeiters, so rightly condemned by law."

September 26, 2008 at 5:52 PM  
Blogger Vilhelm S said...

"ie, the exchange rate between a dollar in the bank and a dollar under the mattress cannot exceed 1:1"

This, I think, is the first wrong step of the argument. The point of banks is that having money in your account is better than having it under your mattress because you get paid interest on it.

If you keep money under your mattress, it doesn't do anyone any good. If you lend it to a bank, it gets used to build factories, develop new and better cars, and generally make all of us richer. This is why the cooperative equilibrium, where everyone agrees to keep their money in the bank rather than withdrawing it, is preferred over the uncooperative one.

September 26, 2008 at 10:18 PM  
Anonymous Some Guy said...

"If you keep money under your mattress, it doesn't do anyone any good."

It benefits the saver with peace of mind (unless we're talking about fiat currency, which will diminish in value over time.)

September 27, 2008 at 2:32 AM  
Blogger AMcGuinn said...

I'm with tggp on this one.

I agree with MM that problems like the current one are fundamentally inherent in the system, and not absolutely preventable. Even so, we may be better with the system than without it.

One counterargument might be that the system has only worked as well as it has done for 200-odd years because it was not understood. The better it is understood by the participants, the less well it will work. Many games have that property. I don't know if it is MM's claim.

As to how well we could do without fractional reserve, there are two questions I have. First is how much real long-term money there is that could securely make long-term loans. Pensions, obviously, can safely make long-term investments. Insurers could reasonably hold a mix of maturities.

The second and bigger question is how you stop people borrowing short to lend long. If a ban produces a very steep yield curve, maturity transformation would become hugely profitable. No loan, after all, is 100% secure: if I borrow for a year to buy a machine to make widgets, repayment of the loan depends on the future market value of widgets. If I borrow for a year to buy 30-year bonds, repayment depends on the future market value of 30-year bonds. Er, 29-year bonds. Whatever.

Making one process legal and the other not, even for good reason, is going to be difficult to manage.

September 27, 2008 at 2:48 AM  
Blogger Black Sea said...

I have my doubts about your plan, Paulson's plan, eveybody's plan.

Speaking of plans, I found this comment telling:

In fact, some of the most
basic details, including
the $700 billion figure
Treasury would use to buy
up bad debt, are fuzzy.

"It's not based on any
particular data point,"
a Treasury spokeswoman
told Tuesday.
"We just wanted to choose
a really large number."

Well, at least there's one honest person in government (assuming she still has her job.)

September 27, 2008 at 6:52 AM  
Anonymous Libra said...

Because my results are... disturbing. If you suspect that they might be right, please try thinking through the problem for yourself.

I think a key question is, what is the ratio of formally backed credit (FDIC) to informally backed credit. No matter what happens, the Feds won't let the FDIC go under. Hyperinflation is limited by Oil ETFs, commodity index funds, and foreign pressure. So it seems the potential damage is at least bounded.

It might be that letting most of the high powered money collapse, while bailing out a few select institutions and the FDIC, would actually clean out the mess. Judging by median wages, it's unclear if a lot of the M3 that was created in the last decade ever made it to Main St., other than in the form of housing prices. Thus if it collapses significantly, the effect might not be devastating.

But yes, I agree the ultimate solution is 1) the government needs to fix it's accounting. It should know exactly how big supply of Federal Reserve Notes is, and what the formal guarantees are. and 2) it is infeasible to promise to back a bank's liabilities without taking full management control of the bank. Mises was right. The middle road leads to socialism.

September 27, 2008 at 8:40 AM  
Blogger George Weinberg said...

A few points:

Term length of loans isn't really the problem. The idea that you can withdraw or transfer your money when you need it is more or less essential to the concept of a bank account, and as others have pointed out, there are always risks due to defaults, robberies, etc. What makes a run on a bank possible is that your account, what you own, is denominated in dollars. That means that if the bank starts to get in trouble, every depositor withdrawing money makes it worse for everyone else.

I have some money in a bond mutual fund, it gives (on average) better returns than a bank account would and I can even write checks against it (albeit only for $250 or more). Because my account is denominated in shares rather than dollars, I am in no way put at risk if other account holders decide to cash out. The down side is that the account can and sometimes does lose dollar value, but not very often and never very much.

The other point is, if the state ran the banks directly, decisions as to who gets loans at what rates would be made based on political rather than economic grounds to a much greater rate than today. This would likely lead to utter disaster.

September 27, 2008 at 4:16 PM  
Anonymous Libra said...


You are essentially owning a collection of maturity matched loans. Since the loans are stable, the market to resell the loans is also stable, and you personally can treat them as if they are liquid assets. But legally, no one has the obligation to give you cash for your shares, you own the shares permanently. This means it's not maturity mismatched.

I do wonder though, instead of suspending payment altogether during a bank run, why don't banks convert the deposit rights into shares? That way you wouldn't have the problem where the last person to get to the bank loses.

September 27, 2008 at 9:52 PM  
Anonymous P.M.Lawrence said...

A number of observations:-

- When you have a phase change effect, there is some underlying process for which the curve on the graph that describes it has reversed its slope. That means, if you suspect this is what has happened, you should look out for something like that underneath.

- Consider the idea of buoyancy. A floating object displaces its own weight of the supporting fluid. This is natural and obvious up to a point, e.g. if you put a block of wood in a brim full glass of water, precisely that weight of water will spill over. But this insight is deceptive. If you have a glass with just a little water in it and put in a block of wood nearly as big as the glass, it will float - but there was never as much weight of water as the block to begin with. Putting the block in materially raised the waterline. In fact, the "displaced water" is a fiction, a virtual weight, describing the weight of water that would fill the volume filled by the block up to the actual waterline attained - even though floating the block affects the waterline - and it only has real significance in special cases like starting with the full glass. Similarly the value of an asset pool isn't related to actual money but, in this sense, displaced money. Short of liquidating it, the value can be estimated by estimating the supply/demand curves and making an appropriate integral. Multiplying total amount by market price is a poor approximation of this, though it does help set bounds, but unfortunately there is no good way to estimate those curves, and in any case that total value can't be split meaningfully between the holders of the portions of the pool - who gets what is path dependent on just who liquidates what, when; but at least we know about integrating along paths. At any rate we have highlighted just what it is we don't know.

- There are at least two alternative approaches to financing we can look at, i.e. Sharia finance and the material Meir Kohn wrote up in his The Capital Market Before 1600 (unfortunately I cannot find a current link for this).

I hope this provides people with food for thought.

September 28, 2008 at 1:54 AM  
Anonymous Anonymous said...

Wow, very interesting post. Will have to come back and read again to fully digest.

I'm a bit skeptical of your (I think) rather casual dismissal of Austrian economics. I've been reading the blogs on this subject for about 7 years and this is the first time I've seen someone come kinda out of the blue with a somewhat deep analysis of things.

Most of the arguments made in the MSM or the blogs are generally quite vague, and either obviously incorrect (generally, the Keynesians, or poeple that really have no clue beyond what they've read in the newspaper), or fairly correct (The Austrians (or so I assume)....Lew Rockwell, Ron Paul, Peter Schiff, etc)

To be honest, as I said above, the arguments the competing camps put are so obviously correct or incorrect to a sufficiently knowledgeable and logical person, and the argument never seems to go anywhere, that at least for me, I've never had the energy to refine it further....its a lot of hard work, which I'm sure you could attest.

I think my main point of this reply though is, you likely have missed some valid points on your bailout scheme. At the very least, in your 3 comparisons, you must admit it was a straw man argument. So, taking the first two (from the either sides of the economic argument) and making yours look best is not that hard. Although I fully concede your argument wasn't that simplistic. But before you condemn Astrian economics, I think you should read Man, Economy an State by Murray Rothbard. And I'm not saying that if you haven't read this you can't comment, I'm just saying I assume your goal is absolute correctness (as much as is possible in this field), and thats 800+ pages of pretty heavy duty thinking. If you haven't read it, I would be surprised if you didn't learn something important that would alter your thinking.

Overall, a great post.....but I assume you want to be taken *really* seriously (or you should, with the amount of research and thinking you are putting in), I think your section on the comparison on bailout strategies was really poor. Like, really poor.

But I'm sure you know this already. I'm going to read more of your posts, this one was great, very, very impressive.

September 28, 2008 at 8:11 PM  
Anonymous P.M.Lawrence said...

Here is a current link to Meir Kohn's The Capital Market Before 1600.

September 29, 2008 at 12:49 AM  
Anonymous Ajay said...

Decent overview of what led us to where we are today, though the Austrians had all this figured out a long time ago. You do not seem to grasp though that maturity transformation (MT) is not the right word for the issue at hand, it is the other word that you seem to think is synonymous: fractional-reserve banking (FRB). The difference between the two is that, while MT has its own lesser risks, money under normal MT does not inflate the money stock, while FRB money does. This is because you can nominally remove your money from a fractional-reserve bank at any time, except during a bank run of course, while normal MT money is only available at certain dates in the future, meaning the banks can and do plan for that eventuality by matching maturities as best they can. This is why some commenters have been confused by what you mean, leading Libra to helpfully correct them.

Your solution does not solve anything, other than perhaps being a first step towards communism. The solution for FRB, of course, is a move towards some sort of full-reserve banking, or at the very least FRB with much higher capital ratios in the 30-90% range, but the fundamental problem is how to avoid massive deflation while the money stock is being shrunk to reach those capital ratios. I think the best way to do it is to have all the banks choose a capital ratio number in the 30-100% range and state a timeline, which would be many years or a couple decades, during which they will slowly liquidate assets to reach that ratio. This will be deflationary but will allow people enough time to get used to and plan for it by renegotiating contracts to take this slow but steady deflation into account. This solution will only happen if the populace is made aware of the dangers of FRB and if they demand that their banks eventually reach a capital ratio of their choosing. The depositors can always slowly move their money over to another bank in yearly chunks if their current bank chooses a ratio lower than what they'd like. The current crisis provides a great opportunity for Austrians to describe exactly how the current crisis and those that came before it are what they've been diagnosing and predicting for a long time and what the solution is: higher capital ratios leading to a more stable financial system. If the Austrians do not use this opportunity to do so, we're all doomed to much worse "solutions" being foisted on all of us.

September 29, 2008 at 3:06 AM  
Anonymous jsboxon said...

There is a very interesting alternative solution buzzing on the Wall Street Journal Forum the last couple of days. Properly accounting for Intangible Assets using existing rules and legislation can greatly strengthen the capital position of commercial debt holders without a huge bailout. Congress can make it happen without raiding the treasury. Two papers by Dr. David Martin who helped committees build the rules around this and helped the Treasury deploy it 5 years ago to catch $10B in taxpayer fraud.

September 30, 2008 at 3:03 PM  
Anonymous Curve of Freedom said...

Gee whiz, this stuff makes my head spin. If I sum it up this way, am I absolutely wrong?

Fractional reserve banking is a questionable practice, but perhaps only in the literal sense. We can and should draw a fine line between scary "imminently callable" fractional-reserve stuff (which can bank runs scalable to the point where they cause total economic collapse) and not-scary interest-bearing loans (which involve some risk but usually benefit both parties). Getting out of the fractional-reserve wilderness will, per se, cause big deflation. We could remedy this with a big old one-time Keynesian fix, which wouldn't be counter-cyclical per se; it would be intended to stop the cycle from ever happening rather than cure it post facto. MM doesn't see this as realistic because it would rob people of their "dollars are like gold" misconception?

After the Keynesian deflation-killer, we could move to a gold standard, more or less, in which loans would be just fine and dandy as long as they weren't callable. Long-term deflation, which would come with a growing economy and an only slightly-growing gold supply, could be dealt with through really low (even negative, why not?) interest rates. Put your goldbacks in the bank and watch them appreciate as prices fall? And banks could start requiring people to pay some percentage of the principle every month (since if they didn't, the real value of the loan would grow)?

So, if you want interest on your savings, fine, buy a CD or some bonds (I think this counts as Good Loan not Bad Maturity Mismatching). Ordinary savings accounts might get the kibosh? Hell if I know.

All I know is, if our banking system relies on Jimmy Stewart asking everyone to please go home, I should to be in the market for a cabin and canned food.

Okay, that's my summation, and I may be completely off base, like, "the shortstop is getting made at me" off base.

October 1, 2008 at 12:12 PM  
Anonymous Anonymous said...

Dirtyrottenvarmint says:

Some of y'all need to go watch "It's a Wonderful Life". One commenter asserted that there is a difference between "maturity mismatching" and an ordinary loan. This is not the case. Every loan involves maturity mismatching.

When you place your assets in a bank deposit account, this is no different from placing your assets in the care of your neighbor who is putting a new addition on his house. When you put your assets into an FDIC-insured deposit account you may predict with a very high degree of confidence that you will be able to withdraw your investment at any time. This is not a "guarantee". The banking institution is an intermediary, nothing more. You are no more "guaranteed" to be able to withdraw your deposits from a bank, than you are guaranteed that you can get your investment principal back from your neighbor. It's illegal, by the way, to use the word "guarantee" in this sense - unless you are WashCorp.

The fact that the bank acts as an intermediary to invest your money in projects with various future expected completion dates is no different from you lending directly to those projects. Again, the bank is merely an intermediary. There is always "maturity mismatching" because this is the nature of investment. (That's investment in the big-I, Y=C+I+G+(X-M) sense.) The free market rate of interest (the price of your investment) will be equal to the rate that compensates for the uncertainty of when you be able to reclaim your investment capital. (Again, "never" is always a point on this scale.)

If your neighbor promises to bury your capital in his back yard and give it back to you immediately whenever you want it, you still run the risk that his back yard, and your investment, will be washed away by a hurricane. Even if you live in Nevada. So, too, if you put your money into a 6 month bank CD and the bank promises to lend your money out only for projects lasting less than 6 months, you still run the risk that the underpaid computer technician at one of these projects will become fed up and abscond with your capital to somewhere tropical. There is no way to engage in perfect "maturity matching".

You can, however, engage in perfect matching of Expected Maturities. Of course, this is what many formerly employed by Wall Street banks tried to do. It's called Risk Management. You are essentially saying that you want these people to have been better at statistical analysis. This would be nice, but it is still not possible to have a perfect record.

So long as there is investment, there will be maturity mismatching. There is no way around it.

Again - fraud is different. If you agree with your intermediary lending agent (your bank) on an expected maturity (term) and risk-appropriate price (interest) and your intermediary lending agent then invokes the power of USG to dilute the monetary unit of the asset in which you have agreed you expect to be paid back, this is fraud. You are getting back a different (and less valuable) asset than what you invested. Asset dilution is a completely different animal from maturity transformation and is, yes, very bad.

October 3, 2008 at 3:02 PM  
Anonymous Anonymous said...

Well written, and I followed until the last point or two. But no matter.

Maybe someone should have asked Bobby what he planned on doing with the money, and record the asset with a qualifier? Sure, he could lie, but then so could everyone. Oh wait. damn.

We can't assume the underlying assets (homes) are worth zero, after all, there is some intrinsic value to having a place to live.

Small consolation, but not nothing.

October 4, 2008 at 8:34 AM  
Blogger RebelEconomist said...

Having read your reference to this post on Brad Setser’s blog, I wanted to read it to see if it contained any novel insights. I am afraid I did not find any.

First, to me there is nothing sinister about maturity transformation. There are many reasons why a borrower might be unable to fulfil their contract with a lender. In the case of a bank, changed patterns of depositor behaviour might be one reason, just as a farmer might default on a one year corn loan because of changed weather patterns. I dare say you are right that maturity transformation makes long term borrowing cheaper (although note that in the UK, mortgage borrowers are reluctant to borrow for long term, apparently for fear of opportunity losses from falls in interest rates). But the lower cost of long term debt strikes me as reflecting an efficiency gain, just as health insurance can be cheaper because there are fewer beds in hospitals than the number of people covered, albeit at the risk of being overwhelmed by a pandemic.

Second, your link between government deposit protection and printing money is spurious. Even with commodity money, the government can provide an extra layer of protection because it can tax people to obtain the money.

The complexity of the monetary system can be overstated. Anyway, in my opinion, the present problems are largely caused by failure to accept simple facts such as that the absence of a guarantee (eg in the shadow banking system) may mean loss, and that resources borrowed, even by the government, are expected to be repaid.

October 5, 2008 at 1:52 PM  
Anonymous Libra said...


The trouble with our current system of Maturity Transformation is the incentive it creates towards the bank run.

Let's say that you owned a bond mutual fund. This fund owns various bonds, ranging from 5 years bonds to 30 year bonds. The fund is widely traded and fairly liquid, so you can sell your shares at any time. Thus you can earn long term interest rates, but have the advantage of instant liquidity. It's very similar to an MT system.

Now let's say that due to poor lending practices, instead of 1% of the bonds defaulting, 10% end up defaulting. Your shares in the bond fund are now worth 90 cents on the dollar. Sucks for you but not the end of the world. You can sell your shares, but the loss is already factored into the price so you don't really have an incentive to sell. If the share price drops too low, the dividends yield will rise, pulling in new investors and stopping the share price fall.

Now let's say that you have an on demand deposit in a bank. Like the bond fund, the bank will make a variety of long term investments. Now let's say it turns out again that 10% of those investments will default. If you have a deposit, it's in your interest to withdraw as soon as you can, so you can get your entire $1, not 90 cents on the dollar. Thus you run to the bank, and withdraw as soon as you can. Of course, everyone else knows this is going to happen. They also know that soon the bank will run out of money to pay people back, and the last people to show up might not get their money out at all. Thus everyone runs to the bank and tries to withdraw.

Now in theory, the bank could try and package the bonds, sell them off, and use the proceeds to pay the depositors at least $.90 on the dollar. But it's likely that whatever made the loans go bad for this one bank, also happened to every other bank. They are all having runs too. Now everyone is trying to sell their bonds, and nobody has money ( because their bank accounts are frozen). At this point you either need a JP Morgan or an FDIC to sort things out, or you the entire financial system collapses.

My question ( and maybe you know the answer), is if the shadow banking system is more like the bond fund or the bank. For instance, if I have money in a money market fund, and 10% of the securities the fund holds defaults, does everyone's share in the fund drop by 10%? Or does the first person to withdraw get $1, and the last one out get nothing ( like in a bank run). If it's the former, then you might be right, Rebel, the problem is that people aren't willing to accept losses. If it's the latter, then you need the Fed to step in and prevent a bank run and massive deflation.

October 5, 2008 at 3:10 PM  
Blogger Aaron Davies said...

ssrn link, second on google: The Capital Market Before 1600

October 6, 2008 at 11:36 PM  
Anonymous Anonymous said...

I think RE's tax the people solution is by far the cleanest.

October 8, 2008 at 6:32 AM  
Blogger RebelEconomist said...


Thanks for your thought-provoking reply. Perhaps I was a little dismissive of the post, having been irritated by the length of it.

You raise an excellent point that the behaviour leading to a run is more endogenous in the case of a bank than a hospital and I agree. I wonder, though, how much the problem is an unavoidable consequence of maturity transformation and (rational) fear of insolvency. The immediate problem is one of capacity. I suspect that, even if the demand deposits were fully matched by demand loans, it would simply not be possible for a normal bank to deal with the turnover in a single working day, especially when the borrowers would be unlikely to repay early in the day. The next problem is the interaction between creditor maturity and pecking order. If a demand depositor fails to get paid out before the bank goes bust, they fall a long way down the pecking order, and are likely to have to wait a relatively long time to be repaid even by the deposit protection scheme, so their incentive to join the run is large. I would not be surprised if the higher ranking claims of longer term investors held up the repayment of demand depositors. I dare say that, in the aftermath of the present crisis, bank bankruptcy rules will be revised to make runs less likely for any given degree of maturity transformation.

As for the shadow banking system, I believe that there are at least two categories. From my UK perspective, I was thinking of the SIVs, which issued short term debt rather than demand deposits. The run on these is a slower process, occurring as debt is not rolled over on maturity. To me, SIV paper is for professional money managers, and they must accept the risk that, if they get caught invested when the SIV goes bust, they will get a liquidation value that may well fall short of their principal. In fact, in my view, the authorities should have discouraged the banks from taking these back onto their balance sheets when they ran into problems last year. In the US, the idea of shadow banking is perhaps more strongly associated with money market funds. I believe that these are like bond mutual funds in that you can redeem your shares to receive your share of the fund value. Although money market mutual funds are for retail investors, I think that, as long as the funds provide adequate information about what they invest in, the investor must put up with any losses. As you say, if the assets of such funds are properly marked to market, there is no reason to redeem, but retail investors do tend to sell losing investments anyway. I think that such investors may have to accept realising a loss if they choose to redeem in haste.

October 8, 2008 at 2:05 PM  
Anonymous Libra said...

I believe that these are like bond mutual funds in that you can redeem your shares to receive your share of the fund value.

I get in a long debate with Mencius about this very issue in this thread.

I'm still not sure if the problem is MT or if the problem was just a massive credit bubble. People expected money market funds to be as safe as cash. If they find out the funds are not as safe, and that they will actually lose money, there is a flight to safety. Money market funds would gradually liquidate as their holdings mature. This would drive up interest rates for corporate paper, bankrupting companies and crashing the economy.

Mencius countered that the market was frozen for even perfectly safe corporate paper, and thus the problem is not risk, the problem is that MT has turned off.

October 9, 2008 at 4:09 PM  
Blogger RebelEconomist said...


I cannot get as excited about this subject as some people seem to, judging by the discussion you linked to; life is too short. Both fractional reserve banking and maturity transformation seem reasonable to me, although perhaps some improvements could be considered to reduce the danger of runs (eg a limited withdrawal rate with some prioritisation procedure). I do agree with you that too many investors (and borrowers) are unwise, either in that they cannot be bothered to do due diligence or that they gamble that someone will bail them out if it goes wrong. This applies to both credit and liquidity losses. Investors knew sub-prime was risky and that moneymarket funds are not guaranteed, but they just hope it will turn out OK in the end.

October 11, 2008 at 10:14 AM  
Blogger Aaron Davies said...

@black sea: reminds me of something i read somewhere about FDR and the brain trust sitting around playing with the dollar/gold ration, and deciding to bump the price by $7, since it was a lucky number.

October 13, 2008 at 12:54 AM  
Blogger Aaron Davies said...

@ajay and the anonymous austrian: um, have you actually, you know, read anything here? mencius is totally down with the austrians.

October 13, 2008 at 12:55 AM  
Anonymous Anonymous said...

+runescape money runescape gold runescape money buy runescape gold buy runescape money runescape money runescape gold wow power leveling wow powerleveling Warcraft Power Leveling Warcraft PowerLeveling buy runescape gold buy runescape money runescape itemsrunescape accounts runescape gp dofus kamas buy dofus kamas Guild Wars Gold buy Guild Wars Gold lotro gold buy lotro gold lotro gold buy lotro gold lotro gold buy lotro gold runescape money runescape power leveling runescape money runescape gold dofus kamas cheap runescape money cheap runescape gold Hellgate Palladium Hellgate London Palladium Hellgate money Tabula Rasa gold tabula rasa money Tabula Rasa Credit Tabula Rasa Credits Hellgate gold Hellgate London gold wow power leveling wow powerleveling Warcraft PowerLeveling Warcraft Power Leveling World of Warcraft PowerLeveling World of Warcraft Power Leveling runescape power leveling runescape powerleveling eve isk eve online isk eve isk eve online isk tibia gold Fiesta Silver Fiesta Gold
Age of Conan Gold
buy Age of Conan Gold
aoc gold

December 22, 2008 at 11:27 PM  
Anonymous Anonymous said...







January 20, 2009 at 11:55 PM  
Anonymous Anonymous said...

情趣用品,情趣用品,情趣用品,情趣用品,情趣用品,情趣用品,情趣用品,情趣用品,情趣用品,情趣用品,情趣用品,情趣用品,情趣用品,情趣用品,情趣用品,情趣用品,情趣用品,情趣用品,情趣用品,情趣用品,情趣用品,情趣用品,情趣用品,情趣用品,情趣用品,情趣用品,情趣用品,情趣用品,情趣用品,情趣用品,情趣用品,情趣用品,情趣用品,情趣用品,情趣用品,情趣用品,情趣用品,情趣用品,情趣用品,情趣用品,情趣用品,情趣,情趣,情趣,情趣,情趣,情趣,情趣,情趣,情趣,情趣,情趣,情趣,情趣,情趣,情趣,情趣,情趣,情趣,情趣,情趣,情趣,情趣,情趣,情趣,情趣,情趣,情趣,情趣,情趣,情趣,情趣,情趣,情趣,情趣,情趣,情趣,情趣,情趣,情趣,情趣,情趣,美國aneros,rudeboy,英國rudeboy,英國Rocksoff,德國Fun Factory,Fun Factory,英國甜筒造型按摩座,甜筒造型按摩座,英國Rock Chic ,瑞典 Lelo ,英國Emotional Bliss,英國 E.B,荷蘭 Natural Contours,荷蘭 N C,美國 OhMiBod,美國 OMB,Naughti Nano ,音樂按摩棒,ipod按摩棒,美國 The Screaming O,美國TSO,美國TOPCO,美國Doc Johnson,美國CA Exotic,美國CEN,美國Nasstoy,美國Tonguejoy,英國Je Joue,美國Pipe Dream,美國California Exotic,美國NassToys,美國Vibropod,美國Penthouse,仿真按摩棒,矽膠按摩棒,猛男倒模,真人倒模,仿真倒模,PJUR,Zestra,適趣液,穿戴套具,日本NPG,雙頭龍,FANCARNAL,日本NIPPORI,日本GEL,日本Aqua Style,美國WET,費洛蒙,費洛蒙香水,仿真名器,av女優,打炮,做愛,性愛,口交,吹喇叭,肛交,魔女訓練大師,無線跳蛋,有線跳蛋,震動棒,震動保險套,震動套,TOY-情趣用品,情趣用品網,情趣購物網,成人用品網,情趣用品討論,成人購物網,鎖精套,鎖精環,持久環,持久套,拉珠,逼真按摩棒,名器,超名器,逼真老二,電動自慰,自慰,打手槍,仿真女郎,SM道具,SM,性感內褲,仿真按摩棒,pornograph,hunter系列,h動畫,成人動畫,成人卡通,情色動畫,情色卡通,色情動畫,色情卡通,無修正,禁斷,人妻,極悪調教,姦淫,近親相姦,顏射,盜攝,偷拍,本土自拍,素人自拍,公園露出,街道露出,野外露出,誘姦,迷姦,輪姦,凌辱,痴漢,痴女,素人娘,中出,巨乳,調教,潮吹,av,a片,成人影片,成人影音,線上影片,成人光碟,成人無碼,成人dvd,情色影音,情色影片,情色dvd,情色光碟,航空版,薄碼,色情dvd,色情影音,色情光碟,線上A片,免費A片,A片下載,成人電影,色情電影,TOKYO HOT,SKY ANGEL,一本道,SOD,S1,ALICE JAPAN,皇冠系列,老虎系列,東京熱,亞熱,武士系列,新潮館,情趣用品,約定金生,約定金生,情趣,情趣商品,約定金生,情趣網站,跳蛋, 約定金生,按摩棒,充氣娃娃,約定金生,自慰套,G點,性感內衣,約定金生,情趣內衣,約定金生,角色扮演,生日禮物,生日精品,約定金生,自慰,打手槍,約定金生,潮吹,高潮,後庭,約定金生,情色論譠,影片下載,約定金生,遊戲下載,手機鈴聲,約定金生,音樂下載, 約定金生,約定金生,開獎號碼,統一發票號碼,夜市,統一發票對獎,保險套, 約定金生,約定金生,做愛,約定金生,減肥,美容,瘦身,約定金生,當舖,軟體下載,汽車,機車, 約定金生,手機,來電答鈴, 約定金生,週年慶,美食,約定金生,徵信社,網頁設計,網站設計, 約定金生,室內設計, 約定金生,靈異照片,約定金生,同志,約定金生,聊天室,運動彩券,大樂透,約定金生,威力彩,搬家公司,除蟲,偷拍,自拍, 約定金生,無名破解,av女優, 約定金生,小說,約定金生,民宿,大樂透開獎號碼,大樂透中獎號碼,威力彩開獎號碼,約定金生,討論區,痴漢,懷孕, 約定金生,約定金生,美女交友,約定金生,交友,日本av,日本,機票, 約定金生,香水,股市, 約定金生,股市行情, 股市分析,租房子,成人影片,約定金生,免費影片,醫學美容, 約定金生,免費算命,算命,約定金生,姓名配對,姓名學,約定金生,姓名學免費,遊戲, 約定金生,好玩遊戲,好玩遊戲區,約定金生,線上遊戲,新遊戲,漫畫,約定金生,線上漫畫,動畫,成人圖片, 約定金生,桌布,桌布下載,電視節目表, 約定金生,線上電視,約定金生,線上a片,約定金生,線上掃毒,線上翻譯,購物車,約定金生,身分證製造機,身分證產生器,手機,二手車,中古車, 約定金生,約定金生,法拍屋,約定金生,歌詞,音樂,音樂網,火車,房屋,情趣用品,約定金生,情趣,情趣商品,情趣網站,跳蛋,約定金生,按摩棒,充氣娃娃,自慰套, 約定金生, G點,性感內衣,約定金生,情趣內衣,約定金生,角色扮演,生日禮物,精品,禮品,約定金生,自慰,打手槍,潮吹,高潮,約定金生,後庭,情色論譠,約定金生,影片下載,約定金生,遊戲下載,手機鈴聲,音樂下載,開獎號碼,統一發票,夜市,保險套,做愛,約定金生,減肥,美容,瘦身,當舖,約定金生,軟體下載,約定金生,汽車,機車,手機,來電答鈴,約定金生,週年慶,美食,徵信社,網頁設計,網站設計,室內設計,靈異照片, 約定金生,同志,聊天室,約定金生,運動彩券,,大樂透,約定金生,威力彩,搬家公司,除蟲,偷拍,自拍, 約定金生,無名破解, av女優,小說,民宿,約定金生,大樂透開獎號碼,大樂透中獎號碼,威力彩開獎號碼,討論區,痴漢, 約定金生,懷孕,約定金生,美女交友,約定金生,交友,日本av ,日本,機票, 約定金生,香水,股市, 約定金生,股市行情,股市分析,租房子,約定金生,成人影片,免費影片,醫學美容,免費算命,算命, 約定金生,姓名配對,姓名學, 約定金生,姓名學免費,遊戲,約定金生,好玩遊戲,約定金生,好玩遊戲區,線上遊戲,新遊戲,漫畫,線上漫畫,動畫,成人圖片,桌布,約定金生,桌布下載,電視節目表,線上電視, 約定金生,線上a片,線上a片,線上翻譯, 約定金生,購物車,身分證製造機,約定金生,身分證產生器,手機,二手車,中古車,法拍屋,歌詞,音樂,音樂網, 約定金生,借錢,房屋,街頭籃球,找工作,旅行社,約定金生,六合彩,整型,水噹噹,貸款,貸款,信用貸款,宜蘭民宿,花蓮民宿,未婚聯誼,網路購物,珠海,下川島,常平,珠海,澳門機票,香港機票,婚友,婚友社,未婚聯誼,交友,婚友,婚友社,單身聯誼,未婚聯誼,未婚聯誼,婚友社,婚友,婚友社,單身聯誼,婚友,未婚聯誼,婚友社,未婚聯誼,單身聯誼,單身聯誼,婚友,單身聯誼,未婚聯誼,婚友,交友,交友,婚友社,婚友社,婚友社,大陸新娘,大陸新娘,大陸新娘,越南新娘,越南新娘,外籍新娘,外籍新娘,台中坐月子中心,搬家公司,搬家,搬家,搬家公司,線上客服,網頁設計,線上客服,網頁設計,網頁設計,土地貸款,免費資源,電腦教學,wordpress,人工植牙,關鍵字,關鍵字,seo,seo,網路排名,自然排序,網路排名軟體,

January 31, 2009 at 9:49 PM  
Anonymous Anonymous said...

Creative Zen Converter ,How to convert Video to Creative Zen (Vision, V plus, etc),DVD to Creative Zen Converter,MPG MPEG to Creative Zen,WMV to Creative Zen,VOB to Creative Zen,AVI to Creative Zen,FLV to Creative Zen,MP4 to Creative Zen,MKV to Creative Zen,RM RMVB to Creative Zen

February 5, 2009 at 9:06 PM  
Anonymous Anonymous said...

徵信, 徵信社, 感情挽回, 婚姻挽回, 挽回婚姻, 挽回感情, 徵信, 徵信社, 徵信, 捉姦, 徵信公司, 通姦, 通姦罪, 抓姦, 抓猴, 捉猴, 捉姦, 監聽, 調查跟蹤, 反跟蹤, 外遇問題, 徵信, 捉姦, 女人徵信, 外遇問題, 女子徵信, 外遇, 徵信公司, 徵信網, 徵信, 徵信社, 外遇蒐證, 抓姦, 抓猴, 捉猴, 調查跟蹤, 反跟蹤, 感情挽回, 挽回感情, 婚姻挽回, 挽回婚姻, 感情挽回, 外遇沖開, 徵信, 徵信, 徵信社, 抓姦, 徵信, 徵信社, 外遇蒐證, 外遇, 通姦, 通姦罪, 贍養費, 徵信, 徵信社, 徵信社, 抓姦, 徵信社, 徵信社, 徵信, 徵信, 徵信公司, 徵信社, 徵信, 徵信公司, 徵信社, 徵信社, 徵信社, 徵信社, 徵信社, 徵信公司, 徵信社, 徵信, 徵信, 徵信公司, 女人徵信, 外遇, 外遇, 外遇, 外遇

徵信, 徵信網, 徵信社, 徵信網, 徵信, 徵信社, 外遇, 徵信, 徵信, 徵信社, 抓姦, 徵信, 徵信社, 外遇, 徵信社, 抓姦, 徵信社, 徵信公司, 徵信, 徵信社, 徵信公司, 徵信, 徵信社, 徵信公司, 徵信社, 徵信社, 徵信社, 徵信社, 徵信, 徵信社, 徵信社, 徵信社, 徵信,

February 12, 2009 at 1:36 AM  
Anonymous Anonymous said...

At least Wow Gold for now.then
cheapest wow goldwas one whom Buy Wow GoldMannoroth couldcheap wow gold especially not cheap wow gold With the death of the queen?s advisor, Lordbuy world of warcraft gold
Xavius, the WOW FAQcaptain had become wow gold her liaison. Whenever the glorious Azshara opted WOW US not to gift those wow gold cheap working in the
chamber with wow gold news her magnificent presence,
wow gold about the guard captain took her place.
my site is :

February 16, 2009 at 6:31 PM  
Blogger sex said...









February 18, 2009 at 3:45 AM  
Anonymous Anonymous said...







February 27, 2009 at 9:02 PM  
Anonymous Anonymous said...

^^ nice blog!! thanks a lot! ^^

徵信, 徵信社, 徵信, 徵信社, 徵信, 徵信社, 徵信, 徵信社, 徵信, 徵信社, 徵信, 徵信社, 徵信, 徵信社, 徵信, 徵信社, 徵信, 徵信社, 徵信, 徵信社, 徵信, 徵信社, 徵信, 徵信社, 徵信, 徵信社, 徵信, 徵信社, 徵信, 徵信社, 徵信, 徵信社, 徵信, 徵信社, 徵信, 徵信社,

March 2, 2009 at 10:26 PM  
Anonymous Anonymous said...

^^ nice blog!! ^@^

徵信, 徵信, 徵信, 徵信社, 徵信社, 徵信社, 感情挽回, 婚姻挽回, 挽回婚姻, 挽回感情, 徵信, 徵信社, 徵信, 徵信, 捉姦, 徵信公司, 通姦, 通姦罪, 抓姦, 抓猴, 捉猴, 捉姦, 監聽, 調查跟蹤, 反跟蹤, 外遇問題, 徵信, 捉姦, 女人徵信, 女子徵信, 外遇問題, 女子徵信, 徵信社, 外遇, 徵信公司, 徵信網, 外遇蒐證, 抓姦, 抓猴, 捉猴, 調查跟蹤, 反跟蹤, 感情挽回, 挽回感情, 婚姻挽回, 挽回婚姻, 外遇沖開, 抓姦, 女子徵信, 外遇蒐證, 外遇, 通姦, 通姦罪, 贍養費, 徵信, 徵信社, 抓姦, 徵信社, 徵信, 徵信, 徵信公司, 徵信社, 徵信, 徵信公司, 徵信社, 徵信公司, 徵信, 徵信公司, 女人徵信, 外遇

徵信, 徵信網, 徵信社, 徵信網, 外遇, 徵信, 徵信社, 抓姦, 徵信, 女人徵信, 徵信社, 女人徵信社, 外遇, 抓姦, 徵信公司, 徵信, 徵信社, 徵信公司, 徵信, 徵信社, 徵信公司, 徵信社, 徵信社, 徵信社, 徵信社, 徵信社, 徵信, 徵信社, 女人徵信社, 徵信社, 徵信, 徵信社, 徵信, 女子徵信社, 女子徵信社, 女子徵信社, 女子徵信社, 徵信, 徵信社, 徵信, 徵信社, 徵信, 徵信社, 徵信, 徵信社, 徵信, 徵信社, 徵信, 徵信社, 徵信, 徵信社, 徵信, 徵信社, 徵信, 徵信社, 徵信, 徵信社, 征信, 征信, 徵信, 徵信社, 徵信, 徵信社, 征信, 徵信, 徵信社, 徵信, 徵信社, 徵信, 徵信社, 徵信, 徵信社, 徵信, 徵信社, 徵信, 徵信社, 徵信, 徵信社,

March 2, 2009 at 10:26 PM  
Anonymous Anonymous said...


March 6, 2009 at 5:48 AM  
Anonymous Anonymous said...








March 20, 2009 at 7:53 AM  

Post a Comment

Subscribe to Post Comments [Atom]

<< Home