tag:blogger.com,1999:blog-582368152716771238.post1887197928531421115..comments2024-03-28T14:41:03.793-05:00Comments on The Grumpy Economist: Lazear on Dodd-Frank and CapitalJohn H. Cochranehttp://www.blogger.com/profile/04842601651429471525noreply@blogger.comBlogger36125tag:blogger.com,1999:blog-582368152716771238.post-24707939862064756532016-01-08T05:11:13.033-06:002016-01-08T05:11:13.033-06:00Its been among the best use of the sources. Its been among the best use of the sources. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-83886385339429257112015-10-26T00:37:58.347-05:002015-10-26T00:37:58.347-05:00I meant Jefferson.I meant Jefferson.Ahttps://www.blogger.com/profile/17386123430230365251noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-62869163897499338832015-10-25T20:11:55.367-05:002015-10-25T20:11:55.367-05:00Phillipe,
I said Jefferson (as in Thomas Jefferso...Phillipe,<br /><br />I said Jefferson (as in Thomas Jefferson), not Jackson (as in Andrew Jackson).<br /><br />Though you are correct, the link that Wikipedia provides as a cite:<br />http://www.mmisi.org/ir/45_1-2/westley.pdf<br /><br />Provides no indication of Jefferson's or Madison's objections to a U. S. Mint on Constitutional grounds. Rather, Jefferson and Madison objected only to the creation of a national bank on Constitutional grounds.<br /><br />In fact, Jefferson in 1785 laid out a groundwork for U. S. government coinage of money:<br />http://press-pubs.uchicago.edu/founders/documents/a1_8_5s5.html<br /><br />So I am not sure where Wikipedia obtained it's information.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-79543653822103401472015-10-25T17:56:03.164-05:002015-10-25T17:56:03.164-05:00That's nonsense. Jackson and Madison never opp...That's nonsense. Jackson and Madison never opposed the establishment of a national government mint. That's just wikipedia gibberish. What they were opposed to was a central bank (which was privately owned).<br /><br />"U. S. mint is an unconstitutional overreach of Congressional power."<br /><br />Nonsense, the Constitution specifically gives Congress the power to "coin Money, regulate the value thereof, and of foreign coin", as well as to issue securities and borrow 'on the credit of the nation'.<br /><br />And the ability of commercial banks to create a form of money (deposits) has got nothing to do with the political separation of powers.Ahttps://www.blogger.com/profile/17386123430230365251noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-9527296702693590042015-10-12T15:48:49.502-05:002015-10-12T15:48:49.502-05:00DFA required the FDIC to set up resolution plans f...DFA required the FDIC to set up resolution plans for large banks (seems any company that isn't a saloon). Part of the planning would be to convert certain nondeposit liabilities, e.g., subordinated debt, into failed bank capital/equity. Before DFA, these creditors would participate in the losses in bankruptcy/liquidation. <br /><br />Worse is the fact that DFA was patched together by two of the people that spent decades making the late financial crisis. I don't know of one word in the what 1,300 page legislation that actually addresses the causes of the recent crisis or the proximate crisis. <br />has a Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-84159973890021418472015-10-11T21:49:27.462-05:002015-10-11T21:49:27.462-05:00Or just eliminate the commercial banking sector al...Or just eliminate the commercial banking sector altogether. Federal government issues money without the corresponding debt.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-26501200203480366112015-10-11T21:38:40.585-05:002015-10-11T21:38:40.585-05:00And faced with being forced to lend equity, banks ...And faced with being forced to lend equity, banks can relocate out of the United States.<br /><br />"Yes, one regulation for banks: you loan only equity."<br /><br />Banks - "Fine, we like the regulations in Europe / Japan / etc. better."<br /><br />"Remember they can sell globally."<br /><br />Except that global owners do not have voting control over U. S. tax / spending policy. Fine, U. S. government resorts to selling bonds overseas. U. S. voters decide to suspend all debt repayment. <br />FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-22695210644068267402015-10-11T20:09:11.263-05:002015-10-11T20:09:11.263-05:00?
The federal government has no problem selling bo...?<br />The federal government has no problem selling bonds. Remember they can sell globally. Even then, the federal government can print money.Benjamin Colehttps://www.blogger.com/profile/14001038338873263877noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-3333932657381891542015-10-11T20:07:52.081-05:002015-10-11T20:07:52.081-05:00Another idea is that commercial banks issue mandat...Another idea is that commercial banks issue mandatorily convertible bonds. These bonds would convert to equity if certain triggers were hit.Benjamin Colehttps://www.blogger.com/profile/14001038338873263877noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-36563068757412210932015-10-11T18:55:59.026-05:002015-10-11T18:55:59.026-05:00Sunil,
"I'm not sure if infinitely lived...Sunil,<br /><br />"I'm not sure if infinitely lived investors (and issuers) means that there will be perfect agreement on timing of cash flow needs between the two groups."<br /><br />I guess the question you need to ask is intermediation a frictionless exchange? I don't know of many banks that operate as not for profit, so my guess is that banks (and other intermediaries) charge a profit margin for performing that service.<br /><br />And so, it makes sense to me that infinite life agents would bypass intermediation entirely and keep the profits of exchange to themselves. It's not like either is going to die off before they can realize the gains.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-18105470008729679802015-10-11T12:11:49.727-05:002015-10-11T12:11:49.727-05:00Ralph,
"Primary dealers don't to any sig...Ralph,<br /><br />"Primary dealers don't to any significant extent buy government debt by selling equity."<br /><br />Under Cochrane's full reserve banking proposal they would have to make that choice. <br /><br />"The biggest purchasers of debt are entities with cash to spare: insurance corporations, pension funds, foreign wealth funds, mutual funds etc."<br /><br />Uh, no. Insurance corporations, pension funds, etc. typically buy that debt second hand. At auction when U. S. government debt is sold the single largest purchaser of that debt is the system of primary dealer banks. Don't believe me?<br /><br />Here is an example:<br /><br />http://www.treasurydirect.gov/instit/annceresult/press/preanre/2015/R_20150915_1.pdf<br /><br />Total Issuance: $19.79 billion<br />Total purchase by primary dealers: $13.40 billion (approx. 68%)<br /><br />Under Cochrane's proposal (banks must sell equity to be able to lend), the primary dealers would have had to sell $13.4 billion in additional stock to lend the government $13.4 billion. <br /><br />You still haven't answered the question - why do you think any bank (more specifically it's shareholders) would lend money obtained from new share sales to the federal government?FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-52910832431709660152015-10-11T09:20:12.152-05:002015-10-11T09:20:12.152-05:00Ralph,
That I get on the liability side of its ba...Ralph,<br /><br />That I get on the liability side of its balance sheet; what I do not is what assets will it own for all the reserves it issues? Treasury bills. This will become an autonomous flow for the central bank and if it exceeds the store of bills, some longer term treasuries perhaps, mortgages. You can see where this logic takes us: the Fed cannot control its balance sheet size because preference for liquidity is outside its control. And risks that we now associate with commercial banking get centralized in the central bank. Unless if the "Treasury" under law issues as much overnite debt by law as is required by the Fed so the Fed has no maturity mismatch risk or spread income. The Fee is when all is said and done a bank/clearing house that issues very safe liabilities; liabilities it traditionally issued and bought Gold, treasuries, and in more recent times mortgages and longer term treasuries. <br /><br />It does seem under the set of assumptions I am making, you create a more government owned banking system and a tad less flexible. But thanks again for your response. Anonymoushttps://www.blogger.com/profile/00308504929487340591noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-29823885432040100602015-10-11T09:01:39.504-05:002015-10-11T09:01:39.504-05:00We're already there. Thanks to QE, there are m...We're already there. Thanks to QE, there are more reserves than checking account balances. John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-24555610780912009692015-10-11T06:41:33.412-05:002015-10-11T06:41:33.412-05:00Sunil,
Re your question as to what the Fed balanc...Sunil,<br /><br />Re your question as to what the Fed balance sheet would look like, it would expand a fair bit because everything in checking accounts would be backed by bank reserves.<br /><br /><br />Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-81827966893837981662015-10-11T06:33:14.662-05:002015-10-11T06:33:14.662-05:00I don't see the problem in people putting mone...I don't see the problem in people putting money under mattresses if that's what they want to do.<br /><br />Primary dealers don't to any significant extent buy government debt by selling equity. The biggest purchasers of debt are entities with cash to spare: insurance corporations, pension funds, foreign wealth funds, mutual funds etc. The only reason SIFIs / primary dealers get involved is that government or the Fed refuse to deal with anyone other than a very limited number of large banks. In other words those banks act as agents for the pension funds etc. I.e. central banks are simply delegating administrative work to SIFIs.Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-22644186130023585792015-10-10T03:47:00.603-05:002015-10-10T03:47:00.603-05:00Under autarky, this is a sensible proposal because...Under autarky, this is a sensible proposal because providers of equity capital to the Banking sector can just as easily invest in realty or the Corporate sector. However, if a country has a large inflow of capital from foreign countries with a chronic export surplus but little knowledge of how to invest and/or faces legal barriers from investing in (for example) Defense or strategically important companies, then Bankers can play a discoordination game (i.e. target foreign suckers) by borrowing short term to fund their own equity.<br />There was once a criminal Bank called BCC which got the Sultan of Oman on the hook- he hadn't a clue how to invest his money- but it collapsed despite his deep pockets. This was a disaster for entrepreneurs from a particular ethnic community though they have since recovered because it genuinely was a case of just one or two bad apples rather than full blown systemic incentive incompatibility.<br />Similarly, Germany once had some of the most naive bankers in the world and they got saddled with sub-prime rubbish as well as, under the Eurozone disccordination game, Greek debt etc. This German problem has hurt the real economy of Europe which, if it contributes to the implosion of the European Union, might have real effects on the US.<br />Assuming information asymmetry, Banks always have an incentive to use discoordination games in a manner such that they can turn what ought to be liquidity into their own equity- in other words, they can convince suckers to buy what appear to be 'near cash' assets while showing the regulators that they have equity backing. <br />Discoordination games have mixed solutions featuring crises of one kind or another. Thus, even if Banks are not legeraged, still market corrections, or changes in the law re. 'money laundering' or a National Security led crackdown on particular types of asset holders, will still cause liquidity to dry up, thus requiring a bail out of some sort, to protect the real economy.<br />The proposal given here is a good solution to the co-ordination game of an autarkic financial system with limited information asymmetry and unlimited arbitrage because risk is distributed efficiently. However, if there are significant capital flows from abroad and there are legal/institutional/infomational constraints on some agents then the possibility of a discoordination game arises which is bound to feature Systemic crises requiring bailouts. Furthermore, the Govt has less incentive to check unethical or incentive incompatible behavior by the Banks. Indeed, if there is regulatory capture, Bankers would be better able to turn foreigners into 'suckers' by getting the Govt. to pass laws restricting their ability to access better quality assets.windwheelhttps://www.blogger.com/profile/18099651877551933295noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-11037223547862333702015-10-09T20:09:22.329-05:002015-10-09T20:09:22.329-05:00Ralph,
You make a valid point that banks will ris...Ralph,<br /><br />You make a valid point that banks will rise to circumvent the rules; I was talking about them not coming into being to circumvent rules but to meet the need for near cash like instruments from asset owners in a world where the issuers of claims will want to live without having cash like liabilities. The bank would intermediate between these two non-synchronous preferences. It is in my mind a very creative response to a market need for the "product". Unless of course you outlaw the provision of this product. <br /><br />The full reserve banking I do not fully understand and I should read and think about it before I shoot my mouth off. I can see the attractiveness of having all checking deposits being backed by reserves at the Fed and the rest of the bank liabilities being "equity" like. There will be two "banks" really - one part that collects deposits for the Fed and another that pools equity and invests in a pool of claims. <br /><br />I wonder what the Fed balance sheet will look like though - short term deposits from commercial banks and presumably long dated assets or that Fed will now become the institution with a maturity mismatch (and so where the risk resides). I wonder what the repercussion of that would be and the cultural impact locations of this (Audit the Fed, as the losses if any will be taxpayers). But like I said I have not thought enough and so should now just shut up. <br /><br />Frank,<br />I'm not sure if infinitely lived investors (and issuers) means that there will be perfect agreement on timing of cash flow needs between the two groups. But here again I should plead ignorance of the nuances of these models. <br /><br />But good points both for me to think through. I cannot thank you both enough. Anonymoushttps://www.blogger.com/profile/00308504929487340591noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-71985113199240188242015-10-09T11:39:33.651-05:002015-10-09T11:39:33.651-05:00Ralph,
"So what the point of those silly pri...Ralph,<br /><br />"So what the point of those silly private bank dollars is, I’m not sure."<br /><br />The silliness ultimately stems from the same reasons that we have three distinct branches of government (legislative, executive, and judicial) and two or more political parties (Republican, Democrat, etc.) - separation of power.<br /><br />The U. S. went through periods where the central bank was integrated with the Federal Government - see First Bank of the United States (1791-1811) and Second Bank of the United States (1816-1836).<br /><br />https://en.wikipedia.org/wiki/First_Bank_of_the_United_States<br /><br />"Hamilton's bank proposal faced widespread resistance from opponents of increased federal power. Secretary of State Thomas Jefferson and James Madison led the opposition, which claimed that the bank was unconstitutional, and that it benefited merchants and investors at the expense of the majority of the population.<br /><br />Like most of the Southern members of Congress, Jefferson and Madison also opposed a second of the three proposals of Hamilton: establishing an official government Mint. They believed this centralization of power away from local banks was dangerous to a sound monetary system and was mostly to the benefit of business interests in the commercial north, not southern agricultural interests, arguing that the right to own property would be infringed by these proposals. Furthermore, they contended that the creation of such a bank violated the Constitution, which specifically stated that congress was to regulate weights and measures and issue coined money (rather than mint and bills of credit)."<br /><br />The U. S. Federal Reserve (as a body independent of government) was created in 1913 as a compromise. Note that under objections from Madison and Jefferson, the U. S. mint is an unconstitutional overreach of Congressional power.<br /><br />Your statement - "Plus the state can supply the private sector with whatever amount of dollars are needed to induce the private sector to spend at a rate that brings full employment."<br /><br />Not according to Jefferson and Madison.<br />FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-58985054398275106042015-10-09T11:12:27.835-05:002015-10-09T11:12:27.835-05:00Ralph,
"In contrast, where depositors want t...Ralph,<br /><br />"In contrast, where depositors want their money to be totally safe, their money is simply lodged at the central bank or put into federal debt."<br /><br />And if depositors instead put their money in a safe or under a mattress?<br /><br />The question remains - banks (specifically primary dealer banks) are by far the largest purchasers of federal government debt when that debt is auctioned. These banks are really the ones we are talking about with regard to Strategically Important Financial Institutions (SIFIs).<br /><br />Why do you think any bank (more specifically it's shareholders) would lend money obtained from new share sales to the federal government?FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-17166897119940681892015-10-09T10:48:05.257-05:002015-10-09T10:48:05.257-05:00Sunil,
"Let us imagine a world with no debt....Sunil,<br /><br />"Let us imagine a world with no debt. All claims issued are perpetual claims and assets owned are perpetuals."<br /><br />Okay, so we are in an infinite life agent model? If all claims are perpetual (for instance credit card bills) then everyone must live forever to be able to issue perpetual claims. Assets do not depreciate, get outmoded, or simply turn to dust.<br /><br />"My point was that even this economy is not feasible without a bank like financial system emerging. And there are possibly two reasons for that:<br /><br />1) surplus providers may not have the same term requirement for funds that the issuers have creating a mismatch."<br /><br />In an infinite life agent model surplus providers and issuers live forever. Presumably they will have the same term requirement.<br /><br />Lets adjust your model and say that all claims are marketable floating term claims and that all agents / hard assets are fixed term. This creates a term mismatch. Does banking as an intermediary system solve all the problems?<br /><br />That would depend on whether a system of banking (or individual banks) should be allowed to fail. Suppose bank XYZ borrows from Joe short term to lend to Paul long term. Paul offers his townhouse as collateral on the loan. Paul dies without heirs and the townhouse reverts to the bank. The only problem is the market value of the townhouse is less than the value of the loan bank XYZ owes to Joe.<br /><br />If the bank can default on it's loan from Joe and stay in business, then it can continue it's business of intermediation. If it can't, then bank XYZ goes under, and other enterprises depending on bank XYY for intermediation must look elsewhere. This will likely have an effect on the real economy.<br /><br />Now suppose that bank XYZ cannot borrow short term under any circumstance. To make the loan to Paul, it must sell equity to Joe - this is what Cochrane advocates. In that case, Joe absorbs the risk associated with either Paul defaulting on his loan or the value of the townhouse plunging.<br /><br />The problems with Cochrane's system are fairly obvious:<br />1. The value of a bank's common equity is determined by more than the value of it's assets under control - things like reputation, patent rights owned, and regulatory requirements (state and federal) come into play. By making Joe buy common equity to get a stake in Paul's townhouse, a bank is forcing Joe to take on more risk than he may want.<br />2. Fiscal considerations - how may banks will want to sell common equity so they can turn around and lend the money to the federal government?<br />3. What is short term? It's one thing to say that there can be no lender of last resort function from the central bank. That still doesn't stop an enterprise from attempting to borrow short and invest long using say a short term period of 10 years and a long term period of 11 years.<br />4. What is a bank? Under Cochrane's proposal, banks are no longer permitted to perform credit intermediation. Okay, so Phil opens a used car business and borrows short from a pool of investors to lend long to prospective car buyers.<br />FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-55046492849921595612015-10-09T10:40:47.091-05:002015-10-09T10:40:47.091-05:00Anon,
I'm probably repeating some of Prof Coc...Anon,<br /><br />I'm probably repeating some of Prof Cochrane's points here. Anyway... commercial banks certainly do provide “a greater stock of liquid assets”. Put another way, they supply the economy with some wondrous stuff called “money” which obviates the inefficiencies of barter.<br /> <br />But there’s a problem there, which is that the mere fact of issuing short term liabilities makes banks vulnerable. As Messers Diamond and Rajan said and in reference to the liquidity / money creating activities of banks, “We show the bank has to have a fragile capital structure, subject to bank runs, in order to perform these functions.” See:<br /><br />http://www.nber.org/papers/w7430<br /><br />But luckily we don’t need to rely on private banks to supply dollars because the Fed supplies dollars as well, and it does so without any sort of risk of going bust. Plus the state can supply the private sector with whatever amount of dollars are needed to induce the private sector to spend at a rate that brings full employment. So what the point of those silly private bank dollars is, I’m not sure.<br /><br />Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-45008853436349522232015-10-09T10:21:12.060-05:002015-10-09T10:21:12.060-05:00Sunil,
Your basic point as I understand it is tha...Sunil,<br /><br />Your basic point as I understand it is that shadow banks or other types of intermediary will arise which will try to circumvent the rules. Doubtless they’ll try. But getting banks to obey rules is horrendously difficult ANYWAY. Banks have had to pay over $100bn in fines in the last two or three years for various crimes like fiddling Libor and laundering Mexican drug money.<br /><br />Moreover, the rules of Lazear’s system (which are much the same as full reserve banking) are simplicity itself compared to Dodd-Frank, which stands at about 10,000 pages and counting. And simple rules are easy to enforce as compared to complex rules. Lazear / full reserve has just two basic rules. 1. Where depositors want total safety, their money is kept in a totally safe manner, i.e. lodged at the central bank or put into government debt. 2. Loans to private sector entities, e.g. for mortgages, must be funded just by or to a significant extent by equity. <br /><br />Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-58397644293551268952015-10-09T10:01:37.024-05:002015-10-09T10:01:37.024-05:00You don't. It's mortgages, and other loans...You don't. It's mortgages, and other loans to private sector entities that must be funded wholly or to a significant extent by equity. In contrast, where depositors want their money to be totally safe, their money is simply lodged at the central bank or put into federal debt. <br /><br />As to how to "convince" SIFIs to fund mortgages etc with equity, that's easy. Split the bank industry into two halves or two types of bank, or bank department. Re the "lend to mortgagors" half, just look at the liability side of its balance sheet. That should consist entirely of equity (or X% should be equity if the law says mortgages must be funded X% by equity). And if the equity isn't there, it's fines or prison sentences for those responsible.Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-15334250638226560352015-10-08T14:22:54.400-05:002015-10-08T14:22:54.400-05:00Frank
Thanks for your patience as you let me help...Frank<br /><br />Thanks for your patience as you let me help me think through this a little better each time. <br /><br />Let us imagine a world with no debt. All claims issued are perpetual claims and assets owned are perpetuals. These may have fixed coupons or be equity like but that does not matter very much. The issuers of these perpetuals for argument sakes can buy these claims back when they have economic surpluses. I am removing the "survival constraint" that debtors have when their credit comes due and they have to either repay from accumulated surplus or refinance; for if this becomes difficult for many, it can lead to a credit crunch and disruption of economic activity. <br />My point was that even this economy is not feasible without a bank like financial system emerging. And there are possibly two reasons for that:<br />1) surplus providers may not have the same term requirement for funds that the issuers have creating a mismatch. <br /><br />This term mismatch creates the opportunity for an intermediary that issues short term debt and buys these perpetual claims. <br /><br />2) seen from another perspective it is a tautology that claims issued in aggregate will be collectively owned by all claim owners. The "market portfolio" will be average pool of assets held. <br /><br />While this is true on average, some claim owners will be less risk averse than average and others more so. On the Capital Market Line they will use an intermediary who will issue risk free deposits to some who are risk averse and lend it to the more risk seeking investors. If the level of these exchanges are high - for example there are corporate cash pools/reserve managers that want risk free short term deposits and on the other side there are levered hedge funds, an intermediary will arise to match these two taking on matched exposures on their balance sheets (and looking like a really levered financial sector participants). <br /><br />And all this is in a economy without debt based real economy. You will even here get levered intermediaries. It is easy to see that if you have borrowers in the real economy reacting to price signals, there is no getting away from loans of differing maturity even there. <br /><br />For me the idea that you can somehow get rid of loans from one side of the transaction (borrowing) without considering the other side (the need for some investors to have liquid assets and be shielded from price fluctuations) is incomplete. In my mind deposit insurance brings stability to a system that cannot help but be levered and where agents can change their mind. And the need for them is proportional to how much risk appetite heterogeneity exists; for if there were none every body would hold the market portfolio and there will be no need for anything other than brokers. <br /><br />I am here abstracting away from the other valid considerations about security structure that you raise.<br /><br />Your point on finance impacting the economy I am completely in agreement with. Even in the toy economy I started with large price fluctuations will only make it for difficult for borrowers to borrow raising their "cost of capital" and slowing down activity. And banks also provide the ability to scale the exchange of economic surplus across time unlike in a barter society where these exchanges are bilateral. These gains are no different from gains from specialization anywhere else. <br />Anonymoushttps://www.blogger.com/profile/00308504929487340591noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-39993225761231555342015-10-08T01:27:23.088-05:002015-10-08T01:27:23.088-05:00And that would last until the first government bon...And that would last until the first government bond auction failed.<br /><br />Federal Government - "Hey you banks, to make loans, you must sell equity shares"<br />Bank Equity Shareholders - "Fine, we will never lend to you Federal Government again"<br />Federal Government - ???FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.com