Daniel Fernández Méndez nos envía su propio aporte al debate que están manteniendo en estos días Nicolás Cachanosky y Juan Ramón Rallo. Lo compartimos a continuación.
Nicolas Cachanosky has published recently an article criticizing the Real Bills Doctrine. The debate started with Rallo interviewing White in Juan de Mariana´s Institute. Later White criticized the Rallo´s point of view held in the interview here. Rallo rejoinder to White´s points can be found here. So far the last contribution to the bilateral debate was on White´s side here. So Nicolas is the last adherent to the controversy. I will answer the different critiques made by Nicolas in his article.
a. Banks manage flows not stocks.
Maturity mismatch is still a problem in flow terms. The saving flows materialize in a stock of capital. Banks receive saving flows and allocate them in capital structures through lending to producers. The maturity profile of the capital structure influence their composition (it is clear that it´s not the same a capital structure oriented towards long term capital as the housing market than having an agricultural or commodity oriented economy). Long term capital stocks hasn´t the ability to produce income flows at short notice. So finally stocks matters.
In fact, flows are transformed into stocks that in turn, produce another flows in the future. This is nothing else that the process of capitalization of an economy. Savings (flows) are transformed in certain kind of wealth (capital) that produce another kind of flow (income). As Rallo points out, stocks are nothing else than the present value of future flows.
The key point here is if the expected flows of both, producers and savers are aligned with current flows. As we are going to argue below, the maturity mismatch causes misalignment between them.
b. What kind of discoordination causes maturity mismatch? ABCT is not about maturity mismatch.
We have to remind that savers are nothing more than future consumers with a determined ex-ante temporal profile. So, savers express their temporal willing to recuperate their capital. The temporal profile of the asset chosen by the saver states his willingness to regain the option to consume or reinvest the initial capital. It´s clear that savers expect a flow of income in a determined future date.
Producers receive also the funds with a definite temporal profile. Here it´s expressed in the time structure of the liability chosen. That is, they commit themselves to deliver an income in a determined future date.
The maturity mismatch entails sending contradictory messages to both parties. Savers think that their income will be available in short notice, producers think that they have plenty of time to generate income. As a result, producers tend to freeze savings in capital structures with long maturity processes. They are unable to generate the income flow demanded by savers.
The theory is perfectly aligned with Austrian capital theory and the mal-investment argued by Nicolas. Within the framework provided by the Hayekian triangle we can assert that over-investment is focused in the earlier stages of production (that is, in the long term investments, the ones promoted by maturity mismatch), and the over-consumption (or infra-investment) is focused in the later stages of production (the ones that are underserved by maturity mismatch practices).
Through maturity mismatch, banks are channelling short term savings into long term investments, they are sending contradictory signals to both, producers and savers (future consumers), producing overinvestment in earlier stage of the triangle and infra-investment on later stages. Producers, receiving long term loans, expect to produce new consumer goods in a long period of time meanwhile future consumers, giving up their funds in short term, expect to have those consumer goods in short notice. There is a clear misaligned expectations because of a failed financial intermediation.
If the banking sector wouldn´t misaligned the expectations of wealth creation by producers and wealth disposal by savers, the typical Austrian mal-investment would disappear, the earlier stages of production can only swell in a balanced way if there is someone willing to wait enough time for the whole process of production to mature.
In the same way, the over-consumption wouldn´t happen if the banking sector take care of liquidity issues. Channel funds towards long-term investments has their counterpart in the lack of short term investments (the later stages of production).
We are in complete agreement with Nicolas that is mal-investment the one that causes business cycles, but spread mal-investment, as has been argued, is caused by the misalignment of the expectation of wealth creation and wealth disposal. The usual practice within the banking sector of lending long and borrowing short is the one that causes the misalignment and therefore the one that causes extended mal-investment.
c. Maturity is not a just a banking phenomenon; all industries deal with the same issue.
It´s truth that maturity mismatch can be performed by any industry, but usually, the only one that performs extensively is the banking industry. The cause of that is the lender of last resort function of the central bank. The moral hazard here takes the form of taking advantage of spread between the long and short interest rate and throw away the risk towards the central bank. When liquidity crisis arises the central bank can create liquidity to the banking sector and support it, but it cannot create liquidity to the extremely future oriented capital structure that usually collapse.
d. Why stop in short-term bills? Why not 100% reserve requirement?
There is a little misunderstood here. Make observance of the liquidity rules implies much more than the involvement of sight deposits. As have been argued before, liquidity rules allows to keep in pace the willingness of producers (final debtors) and savers (final creditors). The maturity mismatch can perfectly happen outside the deposit liabilities (in fact Shadow Banking industry didn´t issue or take sight deposits).
The key element with the deposits problem is to understand the difference between capital and money markets. Not all the payments are realized in cash (especially those between merchants), some of them are realized in short term credit. This credit is a way to make a payment and historically has tended to circulate (that is, it´s a mean of payment). When the bank monetize this kind of credit is changing one mean of payment by their own mean of payment, there is no creation of credit or money, only substitution. There is no maturity mismatch, there is new means of payments against new final consumer goods and services. Present goods against new means of payments, when the goods are sold, the credit is repaid and disappear and with it the means of payments created. This point is also in accordance with Austrian Theory (Mises and The Elasticity of the System of Reciprocal Cancellation)