Tuesday, February 9, 2010 56 Comments

Maturity transformation: cat, bag, out

The neo-Austrians have (re-)discovered it:
Even if we accept the case for a 100 percent reserve requirement, we see that the maturity mismatching of liabilities and assets (borrowing short and lending long) is itself perilous—and in the same sense that fractional reserves are perilous.
The matter also now seems understood in high places:
On the liquidity front, there are a host of initiatives underway. The Basel Committee on Banking Supervision is working on establishing international standards for liquidity requirements. There are two parts to this. [...] The second is a liquidity standard that limits the degree of permissible maturity transformation—that is, the amount of short-term borrowing allowed to be used in the funding of long-term illiquid assets. Under these standards, a firm's holdings of illiquid long-term assets would need to be funded mainly by equity or long-term debt.
Yeah, good luck with that, guys. I hope those 57% mortgage-interest rates don't cramp your style. Can I offer you any pitons to go with that yield curve?

In any case, precious UR bandwidth need no longer be allocated to this matter. Just remember - you heard it here first.

Our financial analysis can now address more fundamental concerns. For instance: Ben Bernanke and Robert E. Lee - separated at birth! Again, you heard it here first.


Blogger Carl M. said...

One word: IRAs.

You won't need 57% interest rates for those 30 year mortgages. IRA investors who are young are tying up their money for similar periods of time. THIS is how we could replace Social Security: by pushing up the yield curves.

The idea is progressive. It could be sold from the Left.

February 9, 2010 at 6:07 AM  
Blogger Billy Oblivion said...

You've seen this already, right: http://www.youtube.com/watch?v=d0nERTFo-Sk

February 9, 2010 at 6:30 AM  
Anonymous CrisisMaven said...

I beg to differ (a little): IF banks were held accountable to the same standards as other industries, i.e. to guarantee a "true and fair view" in their balance sheets, the risks of maturity mismatch would be discounted in that balance sheet to the CURRENT dataalways, the risk would figure as a negative number larger than any possible gain, and that would be just the end of it. ONLY BY allowing them to use mathematical "models" that "calculated" that risk differently than an accountant in industry would, was this possible. And that'sdue to government meddling in the regulations of otherwise independent accounting standards bodies. One doesn't even need the Austrians for that.

February 9, 2010 at 6:31 AM  
Blogger Isegoria said...

If we replaced ordinary bank accounts with money-market mutual funds, then we would no longer have this issue of short-term borrowing going to fund long-term illiquid assets.

Instead, the bank's customers would be equity-holders, and there would be no rush in bad times to run on the bank to get yours before everyone else gets theirs.

The worst-case scenario would be that the fund had to break the buck — unpleasant but not catastrophic.

February 9, 2010 at 7:20 AM  
Anonymous Anonymous said...

With each passing year my decision to avoid entanglements with moneylenders and keep my money in my mattress looks wiser.

February 9, 2010 at 9:12 AM  
Anonymous Guy said...

Under these standards, a firm's holdings of illiquid long-term assets would need to be funded mainly by equity or long-term debt.

So liquid long-term assets can still be funded with short term debt or deposits. Meaning maturity transformation isn't really eliminated at all, you just have to make sure all your assets are marketable securities now. (And according to Michael S, who owns a bank, this is how banks operate already.)

February 9, 2010 at 9:57 AM  
Anonymous Anonymous said...

One of them looks like a Confederate general. One of them looks like a camel trader. But they're both bearded Caucasoids, so yeah obviously separated at birth.

February 9, 2010 at 10:48 AM  
Anonymous pwyll said...

Since most long-term mortgages end up at Fannie & Freddie, and are thus backed up by the government, the yield curve will still be screwed up - by the feds instead of the banks. The banks will get more stable; the federal government less so. Not sure which situation is preferable.

February 9, 2010 at 2:51 PM  
Anonymous zanon said...

This is a complete load of crap.

Banks do not loan out deposits. Bank lending is not reserve constrained. 100% reserve requirements would do nothing to a bank's ability to lend. Fractional reserve banking has no impact on lending.

These idiots keep discovering maturity transformation, but seem to be unable to discover a balance sheet.

Morons all

February 9, 2010 at 6:11 PM  
Anonymous Pals said...


In spite of the fact that you unashamedly have the word "Keynesian" in your ideological lapel pin, you exhibit some signs of not being a complete brain-dead retard. This may well be down to the fact that I'm a bit tipsy, but nonetheless, I'd like to give you the benefit of the doubt and ask you to clarify a few things.

From what I've read by and about Post-Keynesians, you lot seem like you are pseudo-socialists who have taken some time off rabble-rousing to understand money and banking. You still believe in the retarded socialist ideas of the government generating employment and achieving market equilibrium and other such garbage. But you combine that with an understanding of the mechanics of fractional reserve banking under a fiat system which might actually make some sense. After stripping away all the dumb romance of neoclassical, Keynesian and Socialist economics, you come out flatly in favor of complete reflation and FDIC-type guarantee of all maturity transformation wherever it may happen in the economy. Right?

This has the advantage of actually understanding money and banking better than neoclassicals, Keynesians and Socialists. But then again, that’s not saying much at all. It seems to me that this is no different than Moldbug’s plan for solving this current crisis.

The question I’d ask you at this point is: Why would you want the state backing all this generation of fake credit? The state is—by definition—captured by the ruling class. And if history has taught us one thing, it is that the ruling class are looking out for themselves.
When you put money and credit generation in the hands of the ruling class, aren’t you just asking for trouble?

More concretely: it seems to me there are two extremes to this position: if you take a pro-government-guarantee position, you let the government FDIC-guarantee all credit issues in the economy, and you end up with the powerful inflating the currency for their own benefit until hyper-inflation.

The other situation is where no one has the right to a coercive guarantee of their credit expansion. This produces a regime where all unbacked credit expansion in unsustainable and collapses quickly. This is what Austrians call a free market. It sounds like a good idea to me.

So why exactly are you an anti-deflationist and why do you support reflation?

February 10, 2010 at 2:12 AM  
Anonymous Anonymous said...


February 10, 2010 at 5:26 AM  
Anonymous StMarc said...

Not directly related, but I just saw this article this morning and thought, "Somewhere, a beam of golden sunshine shot through the clouds and suffused Mencius Moldbug with a saintly aura as this letter was delivered."


February 10, 2010 at 8:08 AM  
Anonymous Johnny Abacus said...


I don't think you give proper respect to just how deflationary forced selling during a crash can be.

Unfortunately, banks can't be mandated to only invest in short term government backed debt - the main reason money market funds are so stable, else there would be no one to originate retail loans.

February 10, 2010 at 9:09 AM  
Anonymous Michael S. said...

It does not reassure me that the Basel Committee has started to concern itself with maturity transformation.

These people are the same ones that devised the Basel 2 accords which encouraged banks to invest in AAA and AA rated securities (e.g., Fannie Mae preferred stock!) rather than to make loans to their own customers based on their own underwriting. We know how that turned out!

Pwyll is absolutely correct. Commercial banks do not make 30-year fixed rate mortgages. Mortgage brokers make such loans and sell them on the secondary mortgage market, mainly to Fannie & Freddie. They are then bundled and sold as long-term bonds. Maturity transformation is not what's wrong with them - it is sloppy underwriting, inadequate collateral, and a government policy that encourages lending to people who haven't a pot to piss in, much less the ability to pay off a mortgage. In short, it is governmental allocation of credit as a tool of social engineering. That's why Barney Frank spoke of "rolling the dice" on subsidized housing. Snake eyes for Barney!

February 10, 2010 at 9:12 AM  
Anonymous Anonymous said...

Love your blog, but think you're giving yourself too much credit here. I also think the current crisis has nothing to do with maturity transformation.

Everyone who knows anything about the business of banking or about banking law and regulation understands the risk posed by the mismatch between banks' assets and liabilities. In general, banks rely on the law of large numbers (i.e., statistically, not everyone will cash out their accounts at the same time) to make money for taking the risk. The law of large numbers generally holds true, and when it does, banks make good money. When it doesn't (when bank runs occur), things don't work out so well for banks.

The government has attempted to solve the problem with deposit insurance, but the bottom line is that all business, including banking, entails some risk. And it banks are not defrauding their customers. The fractional reserve system and the general structure of banks' balance sheets are fully transparent to anyone who cares to look. Consumers of banking services willingly take the risk that their bank might fail. And they did so before there was deposit insurance. The fact that banks sometimes go bust and default on their obligations to creditors doesn't make them materially different from any other type business enterprise. Maturity transformation is neither a mystery nor a scam.

This current crisis was not caused by maturity transformation. Lehman, AIG and Wachovia were not in trouble because of bank runs. The root causes of the financial crisis were twofold -- (1) bankers overvalued loan portfolios, and (2) insurance companies (i.e., credit swap dealers) were undercapitalized and sold too much credit insurance. In other words, this crisis was caused by two related actuarial mistakes. Both are similar in some ways to the maturity transformation risk; they results from a failure of the law of large numbers (the insurers set their capital requirements and the bankers valued loans on an assumptions that loan defaults and collateral value decreases would be uncorrellated in large loan portfolios, but, doh!, the housing market went down everywhere). Even though there are analytical similarities between maturity transformation risk and the risks that caused this crisis, they are not the same thing. In short, undercapitalized insurance is not maturity transformation. Neither is bad banking.

February 10, 2010 at 10:53 AM  
Anonymous zanon said...


I am not Keynesian (please do not confuse me with those morons) but I would rather be Keynesian than idiot Austrian.

You know nothing about what I think correct role for Govt is. Like Mencius, I think Govt should be as small as possible but no smaller. The detail is in what counts as "no smaller" and Austrians, Monetarists, and Keynesians all blithely spout off about this without knowing the first thing about banks, banking, and accounting. Govt has correct roles and functions. It should execute those roles and functions with some basic competancy.

"Why would you want the state backing all this generation of fake credit?"

Pals -- do you even know what fiat currency is? The state already backs all this "fake" credit. You are still stuck in primitive goldbug mentality. Or you are idiot Libertarian, I do not know and I do no care.

FDIC should be unlimited extend to all saving and checking account in banks. MM funds should be killed, and they will be profoundly weakened if FDIC was run right. FDIC funds are NOT LOANED OUT though, so FDIC backing of savings has nothing to do with backstopping banks.

I am anti-deflationist because deflationism is 1) stupid, 2) irresponsible vandalism, 3) damaging to real economy for no good reason.

Austrianism in fiat monetary system is like pouring diesel into petrol engine that is not functioning correctly because idiots driving it pour in ethanol. When you point out to them they are MORONS they go on and on about how create diesel is and show no interest, or even a curiosity, about how banking system ACTUALLY IN REAL LIFE WORKS. Witness this post.

Anonymous is correct -- root cause of this crises was banks making loans that could not be paid back, generalized overleverage of private system, plus an overnight interbank mechanism that is designed by MORONS. It was not maturity transformation.

February 10, 2010 at 11:23 AM  
Anonymous Salvo said...

The fact that in practice loans aren't reserve-constrained and loans create deposits does not mean that the illusion isn't necessary to maintain the practice.

PKs think that fiat currency is simply backed by force and that loans aren't reserve constrained and loans create deposits, and therefore that banks can just expand credit and reflate. But if the popular illusion regarding reserves were removed and everybody *knew* what the PKs claim (or if just enough, not all, the people knew) then there would be tremendous inflation.

February 10, 2010 at 12:15 PM  
Anonymous zanon said...


It is obvious you have no idea what you are talking about. Your understanding of the monetary system is extremely primitive.

You need to learn a more if you are to make progress away from your current "diesel is great let us pour it into petrol engine" position.

So you have figured out deposits do not constrain lending and are, in fact, a CONSEQUENCE of credit creation, and not an enabler. This is good. This position is not belief btw, it is accounting and operational reality.

Next step -- you need to figure out what ACTUALLY constrains credit extension. Maybe you are sober enough now to engage brain and try to figure this out.

February 10, 2010 at 12:36 PM  
Anonymous Salvo said...


When are you going to realize that "accounting and operational reality" consists simply of numbers and moving those numbers around? That these numbers and relations are nothing in and of themselves, that how people evaluate them is paramount?

February 10, 2010 at 12:52 PM  
Anonymous Pals said...

Michael S,

"Snake eyes for Barney" is the best title possible for a mockumentary about the financial crisis. Thanks!


I'm sorry to have aggravated you while you're PMS-ing, but would you care to elaborate for a bit why everyone else is a moron and you are a genius. I'm genuinely and open-mindedly trying to figure out what the fuck you post-Keynesians want. Please respond with something substantive directed to someone who understands Keynesian and Austrian economics very well, but doesn't quite get what you kids want. And feel free to continue insulting Keynesians. Angels jizz when people insult Keynesians.

February 10, 2010 at 1:00 PM  
Anonymous zanon said...


For Gods sake. Look at your post, where you accused me of being vulgar Keynesian, and you tell me if you can see any evidence of your "open mind".

And I never call myself "genius". I just know how banking system works, so maybe compared to MORON primitive austrians I may seem very evolved.

I can tell you what I want for banking system but you will not understand my answer because you do not understand banking system. It is actually much worse because you think you know banking system.

I suggested a good next step to Salvo. He has declined to advance his understanding and I am not surprised. Maybe you can.

Salvo: "When are you going to realize that "accounting and operational reality" consists simply of numbers and moving those numbers around? That these numbers and relations are nothing in and of themselves, that how people evaluate them is paramount?"

You are in such a bad position it is hilarious! What in Gods name do you think a bank is? How on earth do you think Treasury or Fed operates? Maybe you are imaging people running about with wheelbarrows filled with Gold?

Clearly you are not ready to understand what constrains bank credit. You first need to know what happens when check clears!!

February 10, 2010 at 1:36 PM  
Anonymous Paul Davidson is a Retard said...


The PK view boils down to this: fiat currency is simply valuable because the government says so i.e. it can throw you in jail or kill you. So it can pump money into the economy ad infinitum and reflate its way to permanent prosperity.

February 10, 2010 at 1:40 PM  
Anonymous Salvo said...

Maybe you are imaging people running about with wheelbarrows filled with Gold?

Zanon: I don't. But the people do. This is a necessary illusion. Without it, it would collapse.

February 10, 2010 at 1:43 PM  
Anonymous zanon said...

Salvo: You are wrong. If you understood banking system -- and in this case in particular fiscal operations -- you would know why.

PAUL: PK would not agree with the word "prosperity" in your description. PK's understand difference between real and nominal very well.

Austrians, however, certainly do not understand nominal at all and then claim that this stupidity is necessary for well functioning system!! hilarious!

Their understanding of real is a little better I admit because it is simply that of idiot sociopath, and not of hallicinating meth user (which is their grasp of nominal).

February 10, 2010 at 2:07 PM  
Blogger Carl M. said...


If you take demand deposits and buy equities, you are doing maturity transformation and then some. An equity is much like an infinite length bond.

I am not an Austrian. I think their focus on praxeology is crankish. And since the pool of short term deposits does have a minimum, some maturity transformation is acceptable -- not everyone empties their piggy bank at the same time.

But those who think maturity transformation had nothing to do with the underlying problem aren't seeing the entire picture. Housing bubbled for $300,000 homes. People were flipping 2500 square foot new houses. People were buying up beachfront condos and other high-income housing.

Maturity transformation leads to problems even without default. Long term instruments are more volatile on the spot market. When the market values the long term instruments to be less than the short term deposits that created them, we have bankruptcy on paper. With mark-to-market, this is a very big problem.

Without maturity transformation, the spot market of the deposits and loans are in sync. A drop in interest rates increases the value of a mortgage to a bank and of the CD to the depositor. Likewise, an increase in interest rates devalues both. The bank's balance sheet stays balanced.
@Michael S: Some banks do indeed hold onto the mortgages they create. Wachovia is one of them.

February 10, 2010 at 4:01 PM  
Anonymous Pals said...


Look, I'm going to stop all kidding and joking and try to get you to talk about the real issue at hand.

I'm someone who (thinks he) has a very good understanding of Keynesian economics and Austrian economics. What is wrong with my Austrian-flavored view? What do Post-Keynesians say that I should know? Can you recommend a few readings?

I'm being completely serious in trying to figure out what your deal is.

February 10, 2010 at 4:34 PM  
Anonymous zanon said...


Very good -- let us get serious.

You will still need to show interest and make conceptual leap though. I cannot convince anyone, especially Austrian, of anything.

However, I have encountered individuals who, when show what they think is wrong, are able to evolve to new (correct) world view.

Fundamental issue is this:
In our real life banking system, banks do not loan out deposits. Namely, banks do not take deposits and loan out some multiple of them. "Fractional Reserve Banking" is in reality nothing like people think it is, and I am not singling out Austrians.

Since banks do not take short term liabilities (deposits) and use them to fund long term assets (receivable from mortgage) you need to ask yourself what the hell is going on. Because it is not maturity transformation as spouted by austrians.

In reality, Banks make loans out of nothing. They credit receivable (asset), and credit deposit (liability) at the same instant. The credit (loan extension) is triggering event, which is why PKs say "loans create deposits".

In a one bank system this is immediately clear. Think through what happens in a small one-bank town when someone takes out autoloan to buy car from local dealer, you will see what I mean. In a multiple bank system you introduce a central bank with reserve accounts that link them all up. But that is separate issue and I recommend you do not go there yet.

I recommend you focus on loan creation, which as we see, is not reliant on maturity matching as no deposits were drawn down or loaned away. So, since deposit did not enable loan, and reserve do not constrain loan, what on ^&*T* constrain lending?

When you find out answer to this question, your view of what happened in crises will be very different. It will not be Austrian I can assure you of that, but idiot Keynesians and Monetarists are frankly no better. Equity and capital will play much larger role, as will regulatory requirements.

Place where you can continue your investigation, if you are motivated, include sites by warren mosler, winterspeak, billy bog.

mosler's required readings are good place to start, but dense and confusing.
winterspeak is clear, but his archives suck and it is impossible to find anything
billy blog is extremely long winded and tiresome, even more me
also you should treat steve keen, if you ever find him, with extreme caution. He has major blindspot and flaw in this thinking.
Finally, if you read comments, JKH is almost always right.

Good luck!

February 10, 2010 at 5:06 PM  
Anonymous Michael S. said...

Carl M - Were the mortgages Wachovia made and held for its own portfolio 30-year fixed rate mortgages, or 5-year ARM's on a 30-year amortization schedule?

It will be seen that there is not really a maturity transformation with the latter, because even though the amortization schedule is longer, the 5-year term permits repricing at an interval comparable to or even a little shorter than the longest-term CDs offered by most retail banks. Proper funds management typically tries to balance the terms of loans with those of time deposits and to balance demand deposits with cash on hand & due from banks and with publicly-traded, bank-quality (BAA or better rated) securities. My view, as I've posted elsewhere on this blog's comment section, is that most commercial banks that had problems in 2008-9 did with their investments rather than with their loan portfolios. Now banks are actually having more trouble with commercial real estate mortgages (including loans to housing developers) than with individual residential ones. Development loans are especially troublesome, because they are typically sold as participations - i.e., not unlike mortgage-backed securities - and consequently the other participating banks mainly rely on the lead bank's underwriting rather than on thoroughly underwriting the credits themselves. As with MBSs, such participation in CREMs has proved to be a point of weakness.

Anyway - what is wrong with the 5-year residential ARM is that when the interest rate prevailing at the end of its term leads to repricing the next 5-year term at 350 or 400 basis points above the previous one, this may more than double the monthly payment.

This is one of the great proximate causes of the housing market meltdown that began in 2007. The Fed lowered the discount rate to 1% in 2001, with the intention of preventing a recession in the aftermath of the 9/11 attacks. The 5-year mortgages made in late 2001 and in 2002 all repriced 5 years later, after numerous interest rate rises at the Fed. People who found they could no longer afford their monthly payments put their houses on the market, with the result that there was soon a glut of houses for sale. Prices fell as is usual in such a case, and there was a cascading effect as homeowners who had very little equity to begin with in their houses found their equity wiped out by falling prices, the price of their houses 'under water,' i.e., below the amounts due on their mortgages. Countrywide Financial declared bankruptcy late in 2007 and was followed by Fannie & Freddie in August of 2008.

I know nothing of Wachovia's practices other than that they bought up lots of community banks in the South and paid for them with their stock. What had before that been a secure and profitable investment for those community bank owners was transformed into a risky one that eventually became worthless. It was a tragedy for those widows and children who inherited ownership and had no idea what was in store for them.

February 10, 2010 at 5:58 PM  
Blogger Carl M. said...

Wachovia holds onto 30 year fixed mortgages. I have one with them.

5 year ARMs are not maturity transforms as long as they are financed with CDs with the proper mix of maturities, vs. demand accounts.

30 year mortgages are rarely held the full 30 years. The average life of a 30 year mortgage is 7 years. You don't need 30 year money for the entire mortgage even if held the full time. You need 30 year money for the last year's payments.

BTW, Wachovia was for years a very conservative bank. Then they were bought by First Union which had been playing Pac Man across the southeast for several years. They adopted Wachovia's name after buying them.

February 10, 2010 at 7:01 PM  
Blogger Kalim Kassam said...

Posted this in the Hanson/Moldbug thread as well. But, since the action always moves upblog, I reproduce it here. Video from the debate:


February 10, 2010 at 9:10 PM  
Anonymous zanon said...

Welcome back Michael S. It is like tryouts for the special olympics in here.

"An equity is much like an infinite length bond" is actually more ignorant than the post itself. A feat that I am astounded and delighted by.

February 10, 2010 at 10:46 PM  
Anonymous Pals said...


Everything you said so far is very elementary and I understand it. I taught it to undergrads from dumbass Keynesian textbooks and even they understand it.

What constrains bank lending, at the extreme, is the Required Reserve Ratio, but they hardly ever run up against that, so in reality, what constrains them is lending criteria. They can't give out loans to every dumbass who walks in, as they are supposed to set up some standards. Even Barney Frank can't get them to be this retarded. Their preference for getting repaid, government regulations and credit requirements are what constrain their lending.

So what?

I know all of this and don't yet see what is so revolutionary and drastically different about it? Care to walk me through its implications, and why it makes Austrians so wrong?

I'm more than willing to delve into these blogs you recommend, but before I do so I'd appreciate a general outline of your thoughts to know where I'm looking.

February 11, 2010 at 6:38 AM  
Anonymous zanon said...


And to think that I had hopes for you? But no -- you come up with Moron comment like this one: "What constrains bank lending, at the extreme, is the Required Reserve Ratio"

This is incorrect, and this is why I say you do not understand financial system at all.

Clearly everything I said in my post sailed right past your head.
It seems that you need an even smaller first step. Go to the blogs to find out why this statement you made is wrong: "What constrains bank lending, at the extreme, is the Required Reserve Ratio"

February 11, 2010 at 7:14 AM  
Anonymous Anonymous said...

Jesus, the concentration of nerdiness in that room ought to have caused a singularity right then and there.

February 11, 2010 at 8:45 AM  
Anonymous Pals said...


You're being an immature prick and you're wearing my patience thin. I'm trying my best to be open-minded to see what the fuck you guys are going on about, and you reciprocate by being insulting and childish. You seem to mistake my open-mindedness for reverence of you and your ideas. It isn't. Stop acting like you're some messiah who knows the truth and instead make your points and present your arguments like a grown up. Until you've argued your points coherently, you're no more than a comments section troll and I'm making a huge mistake wasting my time indulging you.

You'll notice I qualified my answer on RRR and presented the real answer. I know why you think RRR does not matter, because a bank, by merely being a bank, can just make a loan by creating deposits, thereby creating reserves allowing it to create more loans. Yes, I get that. Austrians get that. I bet even Brad deFuckingLong gets that.

But this is simply a function of the retarded banking/money system that exists today. And this is why Austrians view this system as retarded. By granting banks deposit protection and allowing them an oligopoly, you are giving them a license to print money. This can't be a good idea. You seem to be suggesting that this is good, if only the government handles the whole thing. Could you please elaborate why? Is your ultimate aim something like the complete state control of all money and banking?

Will you please grow up for a second and present your argument. Your idiotic and childish dithering makes me suspect you Post-Keynesians are nothing but peanut-gallery dumbass socialist monkeys who get off on granting the state more power. You are beginning to sound more and more like Brad deLong, in other words.

I'm really not going to ask again, because if you fall back on your dumb routine all over again, then that's really all I need to know you people are full of shit.

February 11, 2010 at 8:55 AM  
Anonymous zanon said...


Your emotional state is of no interest to me. Your mind is full of rubbish and I cannot empty it. You can only empty it yourself.

You keep saying you "understand what I say" and then demonstrate complete ignorance of that. I have encountered this often enough to know there is nothing I can do. The only path is self education and only you can walk this path.

"By granting banks deposit protection and allowing them an oligopoly, you are giving them a license to print money." There are 2 wrong statements in this and one half truth.

Not only is your understanding of banking pitifully small, but so is your demonstrated ability to learn new things, and you are so off on my politics as to be laughable.

You are correct in that this exchange is a waste of time -- it is like talking to an arrogant rock.

There is an older thread somewhere on this site where I had a similar experience with a rock just like you called Matt Franko. He actually did some work and engaged his brain, and is now in a much evolved state. I held no hopes for him either, but he surprised me in the end. I hold no hopes for you.

February 11, 2010 at 9:38 AM  
Anonymous Pals said...


As I expected, you cannot get yourself to fucking state your viewpoint, no matter how nicely I ask, so you resort to name-calling and pretending to be smarter than everyone.

I repeatedly politely asked you to state the stuff you believe and you continued to deliberately avoid it. If you can't state your fucking ideas, then you surely are full of shit, and that's why you resort to this pitiful name-calling.

I can only conclude that you're a worthless retard with an inflated sense of worth. And a retarded inflationary Keynesian worldview. You're just a dumber Brad DeLong, in other words. I hope a bus runs you over, fuckface.

February 11, 2010 at 10:00 AM  
Blogger Carl M. said...

zanon says:

"In reality, Banks make loans out of nothing. They credit receivable (asset), and credit deposit (liability) at the same instant. The credit (loan extension) is triggering event, which is why PKs say "loans create deposits"."

Wrong. Banks make deposits out of loans, but they need some initial capital and/or deposits to make the loans in the first place. But this is not the crucial point.

If we treat the banking system as a single bank and ignore the friction mentioned in the previous paragraph, we still have a maturity transformation. If Joe gets a mortgage to buy a house from Fred, and the money immediately goes into Fred's account, if Fred's account is a checking account we have a transformation from 30 years to 0.

Or to be more precise, we have slices with maturities from 0 to 30 years as bank assets offsetting a demand deposit which is a liability for the bank. Even if Fred puts all the money into 5 year CDs, we still have maturity transformation for the later payments.

February 11, 2010 at 10:32 AM  
Anonymous zanon said...

Pals: If I had a tissue I would give it to you. You are welcome to stew in your potty mouthed ignorance.

Carl M: Maturity Transformation is when financial intermediary takes deposits or investments of one term, and then loans those out at a different term.

In the one bank example, no deposit is being loaned out, so to characterize it as maturity transformation is inaccurate. Moreover, people who say maturity transformation is bad do so because things fall apart if short term debt is not rolled over. But add second bank to one bank example and suppose depositor refuses to roll over his money and moves it to new bank down street and central bank comes into existence so it resembles our planet earth. His original bank can carry on as per the usual.

So we have system where deposit of one term is NOT being loaned out at a different term AND where refusing to roll over the deposit has no functional impact on anything. If you want to continue to insist that "maturity transformation" is a good way to think about such a system you can be my guest. If all you have is a hammer etc...

After all, you claim that equity is like an infinite term bond so obviously no imbecility is beyond you.

February 11, 2010 at 11:02 AM  
Anonymous Molyuk said...

I freely admit I am mere idiot moron with no understanding about how banking system ACTUALLY IN REAL LIFE WORKS. Nonetheless, I'm not impressed by any commenter whose chief shtick is condescension and evasion.

The best use for zanon's posts that I've come up with is to read them aloud in a thick fake Russian accent. They're still not informative, but are much more entertaining.

February 11, 2010 at 7:39 PM  
Anonymous Devin Finbarr said...


Warren Mosler has a bunch of readings in which he lays out the post-Keynesian views: http://moslereconomics.com/mandatory-readings/

I especially recommend the "7 Deadly Innocent Frauds" piece. Winterspeak also has a lot of good stuff on his blog: http://www.winterspeak.com/

A few weeks ago I got in a long discussion with JKH comparing the post-keynesian view with the Austrian view. The discussion is here: http://bilbo.economicoutlook.net/blog/?p=7299

Zanon is just a troll. I have yet to see him post anything interesting. Don't feed the trolls.

February 11, 2010 at 7:55 PM  
Anonymous zanon said...

Devin Finbarr -- I have remember you. Like Matt Franko you have evolved.

Maybe there is method to my madness, no?

Mosler link is excellent. winterspeaks is ok

February 11, 2010 at 8:51 PM  
Anonymous Devin Finbarr said...


I was reading winterspeak and mosler long before I ran into you.

February 11, 2010 at 9:21 PM  
Anonymous zanon said...


I remember your older posts and I have read your newer ones as well.

If you want to claim you have not learned anything new that is of course up to you.

February 11, 2010 at 9:35 PM  
Anonymous Encino said...

zanon and other Post-Keynesian trolls you come across in the econosphere can't ever seem to explain what they believe.

Which is why they always resort to ad hominen attacks and proud exclamations that they understand "how banking works in the REAL WORLD!" and to exhorting everyone to "READ MOSLER NOW!"

February 12, 2010 at 1:01 AM  
Blogger Carl M. said...

zanon's intellected is exceeded only by his tact.

February 12, 2010 at 6:13 AM  
Anonymous zanon said...

You all are too funny! You accuse me of only calling names, but I:

@February 10, 2010 11:23 AM state my position on FDIC,

@February 10, 2010 5:06 PM I tell you how banking system works, and point to more information for those who choose to educate themself

@February 11, 2010 7:14 AM I point out again that banking is not reserve constrained

February 11, 2010 11:02 AM I point out again that banking does not work by maturity transformation.

What all do you want from me? I cannot think for you. You struggle to do it for yourself -- not because you are stupid people, but because mind is filled with wrong ideas.

Carl M says "Banks make deposits out of loans, but they need some initial capital and/or deposits to make the loans in the first place."

He is 1/4 correct. Banks do need capital to start as per regulatory requirements. But they do not need deposits to start making loans. And they do not draw down capital when they start making loans. They do not loan out capital.

Pals says "What constrains bank lending, at the extreme, is the Required Reserve Ratio, but they hardly ever run up against that, so in reality, what constrains them is lending criteria"

He is 1/3 correct. Required Reserve Ratio never ever constrains lending, AND banks hit it all freaking time. It is what makes overnight interbank lending market works, and is how Fed traditionally sets Federal Funds Rate. That is why there is Required Reserve Ratio -- it creates mechanism for rate setting. It is crap mechanism but that is story for another day. He is correct about lending criteria.

So called bank "maturity transformation" just boils down to what business model bank chooses--how much does it want to compete for deposits vs. how much does it want to rely on overnight market vs. how much does it want to risk going to discount window. Michael S educated me on this last time I am grateful to him. It has nothing to do with "transforming" financial asset of one maturity into another. Banks are not machines that match savers and borrowrers the way Austrians believe.

At system level of course option 1 goes away (I presume I do not need to explain to all you smart austrians why that the case. ALthoug maybe I presume too much).

February 12, 2010 at 7:27 AM  
Blogger Mitchell said...

zanon, I was pondering your statement, "Fractional reserve banking has no impact on lending", and I came across something by Steven Keen. On pages 6-7, he basically says that reserve requirements are meaningless, because in practice the central banks always retroactively ratify the growth of credit by printing more money or weakening reserve requirements, at least in the modern era.

It sounds plausible, but you also say: "treat steve keen, if you ever find him, with extreme caution. He has major blindspot and flaw in this thinking." So is there something wrong with what Keen says here, or is his problem in another area?

February 12, 2010 at 8:26 PM  
Anonymous Julius of Orange said...

Maybe it's just me, but Zanon's prose comes across awfully similar to Gene Ray. TIMECUBE will defeat you STUPID EVIL Austrians....

February 12, 2010 at 9:43 PM  
Anonymous zanon said...


Reserve requirements are meaningless because they are just mechanism to create the overnight interbank lending market, which in itself is just way to set federal funds rate.

What Keen says in pages 6-7 are correct, but tone is wrong. Keen does not understand how Govt and only Govt can create net financial assets in private sector. But this is topic I do not want to get into in this forum. If you just look at private sector, Keen is correct. If you start looking at public sector, Keen falls to pieces it is sad

February 12, 2010 at 10:44 PM  
Anonymous the morning benders said...

If you just look at private sector, Keen is correct. If you start looking at public sector, Keen falls to pieces it is sad

Ok. So which Post-Keynesian does get it all right? Can you please tell us so we don't waste our time finally reading the PKs only to be told by you that we have failed to properly receive the secret knowledge because whomever we read was actually wrong on a particular issue.

And do PKs have some kind of serious beef with parsimony or something? Why can't you summarize the key concepts concisely?

February 12, 2010 at 11:30 PM  
Anonymous zanon said...

morning bender:

Keen is correct for just private sector but does not factor in public sector correctly. He is all horizontal, not vertical, which is idiot position.

All other PKs referenced in this thread get both correct. Takes your pick

Someone looking for succinct answers on unqualified reservations is a MORON. hope that is pith enough for you

February 13, 2010 at 8:37 AM  
Anonymous zanon said...

Comments there here has excellent discussion of how it works:

http://macromarketmusings DOT blogspot DOT com/2010/02/feds-exit-strategy DOT HTML

It has too many words so morning bender needs someone to read it and then spoonfeed it to him via twitter or whatever character length his brain is able to process at a time

February 13, 2010 at 8:48 AM  
Anonymous the morning benders said...

Someone looking for succinct answers on unqualified reservations is a MORON. hope that is pith enough for you

No. Most of Mencius Moldbug's key ideas, especially concerning economics, can be expressed pretty clearly, concisely, and logically. The length of the posts here has more to do with style and serves to entertain readers, which I think it accomplishes well, at least for me. You don't get the average person to seriously consider say, monarchy, without seducing them somewhat with amusing style and presentation.

You and other PKs on the other hand can't seem to explain key concepts concisely and clearly. Your long winded ramblings are just evasive and verbose. They either conceal missteps and misunderstandings, or magnify the probability of error of the argument.

February 13, 2010 at 12:44 PM  
Anonymous the morning benders said...


There's no evidence whatsoever that you even understand what you purport to understand.

All we know so far is:

1. There is a set of people called PKs.
2. The PKs claim X.
3. You say you believe X.
4. You can't describe X.
5. You can't explain or justify your belief in X. When you try doing so, you fail miserably, or ramble incoherently.
6. You point to and provide links to long winded ramblings within which X is supposedly contained.

February 13, 2010 at 12:54 PM  
Blogger Tom Hickey said...

Go to this post at Macro and Other Market Musings. JKH, an operational guy, spars with some monetarists. Read this and you will get an idea of what zanon is talking about when he refers to operational vs theoretical.

This is purely descriptive of what happens in a post-1971 monetary system, after Nixon shut the gold window. It makes a range of options possible, from one end of the political spectrum to the other, varying according to the balance of public and private space in the economy.

February 14, 2010 at 10:25 PM  

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