by Thomas Eisenbach and Tanju Yorulmazer - Liberty Street Economics, Federal Reserve Bank of New York
"One of the major roles of banks and other financial intermediaries is to channel funds from savings into valuable projects. In doing so, banks engage in 'liquidity and maturity transformation,' since they finance long-term, illiquid projects while funding themselves with short-term, liquid liabilities. By performing this important role, banks expose themselves to the risk of runs: If depositors or other short-term creditors worry about their claims, they may withdraw funds en masse and cause the bank to fail."Really? When was the last time worry about FDIC-insured bank deposits caused panicked depositors to withdraw the majority of fiat currency deposits from a plain old US commercial bank?
Meanwhile, diverse, heterodox economists (and operational bankers) routinely say that banks in a fiat currency system loan neither reserves nor deposits nor even their own financial capital.
Rather, banks, for a [supposedly] regulated fee, agree to act as middlemen to underwrite and [supposedly] manage to completion, credits & debits, which are denominated and backed by the electorate, through their agent, the Treasury, and it's checking account, the Fed.
The electorate is the real middleman in a fiat currency regime. Our Treasury, Fed and publicly-licensed banks are simply their agents.
Banks MAY have to put SOME of their own capital at risk if a creditor defaults, but my understanding is that they typically do NOT initially loan out their own or depositors capital, or banking reserves.
Given all that, here's what I've really come to think about orthodox "economics."
It's far more sensible to describe orthodox "economics" as political economics, and admit that POWER negotiators define success as asserting control over most variables (including incomes & employment levels) by force - so that they can "manage" the performance of their preferred asset variable.
By fixing most variables within arbitrary bounds, managers try to force unruly systems to follow the projections of a simplistic model - theirs. That's standard practice in the experimental practice of the scientific method, but that's no reason to treat national politics as an experiment run of, for and by naive power-brokers with myopic aims.
The entire field of economics is nothing more than the projection of power politics? regardless of the outcome, it is still distorted by the brain-dead oversimplification of aristocracy & class, which is just one variant of Central Planning failure?
This will never work adequately for anything except the personal pleasure of dictators. Every discipline applying any sort of statistics immediately arrives at "infinite agility" as the variable driving success, sustainability and evolution. (Cue Thermodynamics, chemistry, biology, Darwin, Shewhart, Deming, Construction, and DoD force-readiness.)
The only economic concept that even comes close to an agility reference? A a "pass-through economy," where the ascendancy of Dynamic Assets - distributed and aggregate - is inherent, as an axiom.
What we call "orthodox economics" is merely the simplistic, negotiated gang-rules of a growing, squabbling mob, still trying to re-organize into a sustainable aggregate?
Such gang-rules are always rife with organizational hacks known as arbitrary taboos, covered over by DoubleSpeak.
The price of imposing crudely hacked gang-rules is a certain level of social violence, to keep people from talking about all the, taboo, Pink Elephant conundrums in the room .... such as existing fiat currency operations.
The core issue was pretty much nailed by the early Greek city states. They quite vividly discussed the organizational hurdles in transitioning from tribal to organized, supra-tribal population levels, and zeroed in on both the emerging frictions and available social methods for circumventing them.
It all comes down to speed & breadth of public discourse? If that is maintained, then any pattern of INDIVIDUAL-BASED decision-making can be countered with TIMELY, distributed feedback, to keep isolated decision-making from breaking too many existing & emerging inter-dependencies.
The aggregate or summed quality of distributed decision-making is a function of the distribution, focus and tempo of distributed feedback? That is the first corollary of all "system" theories! By definition, "systems" are those things which include internal methods allowing them to actively respond - autocatalytically - to their own interdependencies.
Yet we've gotten away from the obvious when discussing our own Democracy!
Economics discusses most local decision-making in terms of static, individual TEMPTATIONS. Yet that is a mistake. Social species are defined as those which benefit by selectively pre-programming themselves - to varying degrees - so that a large variety of dynamic inter-dependency signals can and do override the presumed static-resource-temptations which economics simplistically focuses on.
Humans simply do not behave as reliable calculators of dynamic outcomes from simple, reliable static-value inputs.
Rather, they behave as an analog computing device, where an incredibly large number of different inter-dependencies may or may not be triggered, by a wide variety of cues, themselves gated by a wide variety of variable conditioning factors.
It is always, by definition, a mistake to apply any rules-based approach to contingency management for a dynamic aggregate. Rules, by definition, presume static degrees of freedom, where no stasis exists.
Human cultures will little note nor long care who receives another Nobel Prize in Economics for pointing out that things long known in thousands of other disciplines can be added to the naive field of Political-Power-Economics? Surprise, surprise!
No wonder system-scientists & statisticians are so against the very concept of distracting prizes. Any feedback structure that strays from aggregate success being it's own reward ..... ends up, by statistical definition, giving isolated people individual prizes for shitting in their own aggregate's nest!
And humans think they are so smart? In reality, you can always detect brain-dead credentialism by the combined crowing and trailing odor.