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While that would obviously solve the (relatively minor, all things considered) problem of bank runs, the demand for long term loans is not nearly as large as th

by WJW 4y ago

While that would obviously solve the (relatively minor, all things considered) problem of bank runs, the demand for long term loans is not nearly as large as the supply of long term money. Maturity transformation provides real value to the economy by consolidating short term deposits into things like mortgages and long term business loans. Imagine if you could only get 3-year mortgages, after which the entire cost of the house had to be repaid. That would make home ownership unattainable for the vast majority of the population. Alternatively, if you could not access your savings for 10-30 years after depositing I bet a lot of people would not bother at all.

KirillPanov 4y ago
> the demand for long term loans is not nearly as large as the supply of long term money. It is when the loans are priced correctly. This is a clear and obvious sign that the price of long term loans is wrong.
- WJW 4y ago
  Perhaps in a pure market sense, but that's not the world we live in. The government (doesn't really matter where you live) has a vested interest in the status quo and wants people to make long term investments. That is good for both societal stability and for longer term economic growth. Therefore, such a government will support financial institutions in providing long term loans even if that sometimes leads to bank runs. Things like FDIC and related systems in other countries make sure the risk gets smoothed out over all participants in the economy. My point is that when you take the view from the wider society, the price of long term loans should be (nearly) independent from the chance of bank runs. Those are only a problem for the shareholders of the bank itself, but not to the society it resides in.
toast0 4y ago
> Imagine if you could only get 3-year mortgages, after which the entire cost of the house had to be repaid. That would make home ownership unattainable for the vast majority of the population. Alternatively, if you could not access your savings for 10-30 years after depositing I bet a lot of people would not bother at all. Adding on... Balloon mortgages exist, although they're usually not very convenient though, because transaction costs are real and the risk of being unable to find acceptable finance terms when the balloon payment is due is also real. Similarly, lots of people participate in retirement accounts with substantial fees for early access. I guess you could do mortgage lending from retirement funds, but the interest rates aren't compelling (they might be if that was the only source of long term lending though).

by WJW 4y ago

KirillPanov 4y ago

> the demand for long term loans is not nearly as large as the supply of long term money. It is when the loans are priced correctly. This is a clear and obvious sign that the price of long term loans is wrong.

WJW 4y ago
Perhaps in a pure market sense, but that's not the world we live in. The government (doesn't really matter where you live) has a vested interest in the status quo and wants people to make long term investments. That is good for both societal stability and for longer term economic growth. Therefore, such a government will support financial institutions in providing long term loans even if that sometimes leads to bank runs. Things like FDIC and related systems in other countries make sure the risk gets smoothed out over all participants in the economy. My point is that when you take the view from the wider society, the price of long term loans should be (nearly) independent from the chance of bank runs. Those are only a problem for the shareholders of the bank itself, but not to the society it resides in.

toast0 4y ago

> Imagine if you could only get 3-year mortgages, after which the entire cost of the house had to be repaid. That would make home ownership unattainable for the vast majority of the population. Alternatively, if you could not access your savings for 10-30 years after depositing I bet a lot of people would not bother at all. Adding on... Balloon mortgages exist, although they're usually not very convenient though, because transaction costs are real and the risk of being unable to find acceptable finance terms when the balloon payment is due is also real. Similarly, lots of people participate in retirement accounts with substantial fees for early access. I guess you could do mortgage lending from retirement funds, but the interest rates aren't compelling (they might be if that was the only source of long term lending though).