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Another excellent article by SON to distract us for our ambrosia filled weekends.

Isn’t usury and debt diverting attention from the central problem with our banking system.

Maturity Transformation.

People talk about MT as though it is a natural as mother’s milk and the world will cease spinning on its axis if we  prohibit it.

Prohibit it? What madness doth he speak.

At its core Maturity Transformation sails very close to fraud. Lending money for term that which is the property of others and can be demanded at call.

A bank uses, as a basis for loans for varying periods, deposits that it agrees can be paid back at call knowing full well that if everyone who has made ‘at call deposits’ turns up and makes that call they cannot be paid.

They are gambling that people will not ‘run’ and make that call. We know from history what happens when that happens.

We also know from history the ‘solution’ the bankers managed to have adopted. A central bank will just print the money if a a ‘run’ happens so in theory a ‘run’ never happens.

How about we just re-wind the tape and question the need for maturity transformation?

Depositors are perfectly capable of lending for an extended term – term deposits. And the contracts for those terms deposits can be traded if liquidity is required by the depositor – bonds.

If depositor doesn’t like keeping money under the mattress they can certainly pay someone with a solid vault and a convenient system of ATM’s to store their money. Come to think of it, since when did we actually receive any interest from the banks on our ‘at call’ deposits, anyway.

The solution is quite simple – ban maturity transformation.

If a depositor wants deposit money and for it to be available at call (rather than enter a contract to deposit for a term), the bank must hold that money (all of it) on hand so that all of the deposits at call are available in the event of all the depositors making a call.

This would erase the float that funds the activities of bankers.

No need to ban the charging of interest on loans ‘usury’ once the fraud of maturity transformation is prohibited.

…and this

” Your observations regarding MT are valid. But they miss the mark…”

What mark am I missing?

That banks don’t need reserves to create a loan.

No kidding. I have been reading your links for months to that effect and have no issue with that. However, it is clear from Prof Keen’s points below that he is alert that it is not the end of the story.

The point that I am not missing, that you unfortunately are, is that your solution – banning usury – is no solution to the problem you identify – endongenous money creation by banks in an environment of Reserve Accounts at Central Banks – even if it was possible and it clearly is not.

How precisely how do you plan to convince anyone that the charging of interest or receiving interest is not appropriate.

However, prohibiting Maturation Transformation is easily argued and would address many of the problems that current affect banking.

It is simple to explain

“Banks must have funds on hands to meet the claims they have contractually agreed to meet – ie deposits at call”.

“Maturity Transformation is the smelly near fraudulent practice pioneered by Goldsmiths that should be stamped out”

Without the bottomless pit of a central bank reserve account to draw down this would impose a very simple and highly effect limit on Banking behaviour – even if you wish to pursue your long term goal of convincing people that banks should not be allowed to pay or charge interest.

…and this

” It is the maximal decentralisation of the endogenous money creation mechanism, so that every individual is empowered to endogenously create “currency” for him/herself – usury free – subject to uniform, pre-programmed rules.”

That is a very ambitious objective – and I will confess that I am entirely sure what you mean.

Are there any actions short of that objective that would be an improvement or render such gains that failure to attain your objective would be tolerable?

What part of Rome should we commence with?

Banning MT?

…and this