Journal GargamelSpaceman's Journal: Krugman: If the banks are outlawed only outlaws will have banks. 2
http://krugman.blogs.nytimes.com/2011/10/10/if-banks-are-outlawed-only-outlaws-will-have-banks/
It's not news to me that there's nothing preventing FRB from going offshore if it were gone. It may not be practical to even do. But I think I can argue that if it could be done, it would not be harmful.
Krugman writes:
Like a lot of people, my insights draw heavily on Diamond-Dybvig (pdf), one of those papers that just opens your mind to a wider reality. What DD argue is that there is a tension between the needs of individual savers â" who want ready access to their funds in case a sudden need arises â" and the requirements of productive investment, which requires sustained commitment of resources.
Banks can largely resolve this tension, by offering deposits that can be withdrawn on demand, yet investing most of the funds thus raised in long-term, illiquid projects.
To this I say that money is just paper. If savers largely keep their money in shoeboxes under their beds then it is effectively irrelevant to the economy until it is spent. This helps to raise the value of the money that IS available for long term investment creating better incentives to invest long term for those with the vision and the means to do so.
According to Krugman, banks are those entities that borrow short and lend long. This creates adverse selection of ideas because those who prefer to take a loan rather than invest capital they already have are those who believe the interest will not be able to be repaid, but have some hope that their expectations may be exceeded. If you had a dollar it's better to use that dollar on an idea you believe to be good rather than borrow a dollar since you get to earn the interest yourself.
This is analogous to the adverse selection that takes place in the insurance industry. People buy insurance when they think they will need it.
Is it better to try things that you think will fail in the hope that they may succeed and have your expectations exceeded ( by relying on the Fed to increase the money supply so that you can pay the interest ) or is it better to try things that you think will probably succeed in the first place?
Productivity of bad ideas that can't work isn't real productivity.
If there is a lack of money available for long term investing then by all means create more money, but there's no reason banks must create it with a shell game involving other money only available short term. If the short term money is only available for the short term then let it sit harmless in a shoebox.
Leverage! (Score:2)
If you had a dollar it's better to use that dollar on an idea you believe to be good rather than borrow a dollar since you get to earn the interest yourself.
Or borrow a dollar, put two dollars into your good idea, and get twice as much!
Re: (Score:2)
Why not borrow three or four or 100 dollars for your one? What is the downside to you if your idea doesn't work? Your business goes under 100 dollars in debt. Oh well. Your house is foreclosed. At least you TRIED to pay back a mortgage. You might have succeeded. The only reason you are in fact right is that the downside is borne by society as a whole. If you had the capacity to bear the downside, you might think twice about doubling your investment.
Watch for ever tougher bankruptcy laws for individ