Your Life is More Financialized Than You Think

  1. The practical problem is: what do you do when a lot of depositors want their money back, and you run out of cash? You have to sell loans. But loans are illiquid, and if depositors want their money back because they’re panicking, the market price for loans will have dropped a lot. Additionally, borrowing short and lending long leaves you unhedged: if interest rates rise, the cost of your deposits will rise, but the value of your assets will drop. This is not pleasant.
  2. The social problem this introduces is flattening the yield curve. Classically, long-term debt pays more than short-term debt, because of credit risk (more can go wrong in 10 years than in 30 days), because of interest rate risk (a long-term loan’s value is more sensitive to rates), and for transaction cost reasons (borrowing for a ten-year term is, in part, a way to pay not to go to the trouble of borrowing for a month, 120 times in a row).

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Byrne Hobart

Byrne Hobart

I write about technology (more logos than techne) and economics. Newsletter: https://diff.substack.com/