tag:blogger.com,1999:blog-8702840202604739302.post8036775680111153933..comments2024-03-28T03:38:53.734-07:00Comments on MacroMania: Central Banks as Sources of Financial InstabilityDavid Andolfattohttp://www.blogger.com/profile/12138572028306561024noreply@blogger.comBlogger5125tag:blogger.com,1999:blog-8702840202604739302.post-37167571384670714552015-01-29T22:23:06.378-08:002015-01-29T22:23:06.378-08:00I am happy to find this content very helpful and i...I am happy to find this content very helpful and informative for me, as it contains lot of accurate detailing about the topic, which I was searching for. Thanks a lot and good luck.<br /><a href="http://www.capitalheight.com/services.php" rel="nofollow">Indian Stock Market Tips</a>Anonymoushttps://www.blogger.com/profile/13565272099254145460noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-59411538805305450172010-05-10T07:38:50.788-07:002010-05-10T07:38:50.788-07:00Prof J:
I'm glad you noted that demand deposi...Prof J:<br /><br />I'm glad you noted that demand deposit liabilities are (American) put options (redeemable at par for cash).<br /><br />Casual empiricism suggests that the APO is a desirable property to embed in objects that are destined to serve as a medium of exchange. Why this is the case, I am not sure. It may have something to do with fixing the exchange rate of different monies.<br /><br />If all banks issue competing monies redeemable at par and on demand for cash, this results in a de facto fixed exchange rate system between different bank monies.<br /><br />This is also how currency boards fixed exchanges rates (e.g., by making a Peso redeemable on demand and at par for USD).<br /><br />But I haven't yet fully sorted these ideas out.David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-2974263659317581352010-05-09T16:12:20.095-07:002010-05-09T16:12:20.095-07:00Pedro,
I don't think you need to make the ste...Pedro,<br /><br />I don't think you need to make the step to the stock price, although overextension of debt will have an effect on the cost of equity. But extending debt will increase the cost of debt for the firm first. As the firm tries to pile on a greater amount of debt than optimal, the cost of debt and equity will rise for the firm to the point where no projects would have a high enough expected return to be acceptable to the firm. Although, one thinks that prior to this it would become increasingly difficult for the firm to place its debt.<br /><br />It is the case, though, that demand deposits have no true counterpart in non-bank debt. The closest might be commercial paper, since it is short term. But the trick is, very little debt can be traded back in to the company at will for redemption prior to the maturity of the debt.<br /><br />There is one type of debt that is similar to demand deposits, and I think it shows a good way of understanding demand deposits: puttable debt. This debt can be sold back to the issuing firm (put) at the option of the debt holder. The trick is that the put option typically only becomes available after the debt has been outstanding for a while.<br /><br />So, a demand deposit is indefinite-term, no-interest bearing debt that is puttable immediately upon issue.<br /><br />I have to think about the other things you mentioned, David. I think this is a really interesting area, and I'm keen to do some work on how a free banking system would affect corporate finance choices.Prof Jhttps://www.blogger.com/profile/16539902592080231165noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-34756918094133367132010-05-09T13:47:32.898-07:002010-05-09T13:47:32.898-07:00Pedro:
Yes, the presumption is that bad behavior ...Pedro:<br /><br />Yes, the presumption is that bad behavior will be reflected in Microsoft share prices. Why can we not make the same presumption concerning bank shares? Demandable debt probably had a role to play as a disciplining device back when the market for bank shares was not well developed. But whether the argument continues to hold water today is debatable. See also Calomiris, Charles W & Kahn, Charles M, 1991. "The Role of Demandable Debt in Structuring Optimal Banking Arrangements," American Economic Review, American Economic Association, vol. 81(3), pages 497-513.<br /><br />I think at root the argument has to be that free banking is relatively less prone to government meddling. Presumably, this is because to extract resources from the private sector in this case would require direct taxation, something that is politically costly. The inflation tax, on the other hand, seems to be politically more expedient. Maybe.<br /><br />Thanks for the reference to Laidler; I will take a look.David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-92221542611017899952010-05-09T12:20:02.051-07:002010-05-09T12:20:02.051-07:00re Microsoft shares: this kind of behaviour would ...re Microsoft shares: this kind of behaviour would be reflected in the share price, no? In the same way, bad behaviour by a single note issuer would result in its notes being discounted. This prevents the grabbing hand of the state from causing too much trouble, until it starts to regulate all banks. At some point, this would lead to instability and a new central bank (as with the creation of the Fed).<br /><br />I suppose your question is which system can remain more 'independent' of opportunistic government meddling. I don't think Selgin and White have given this question much thought.<br /><br />BTW, Laidler has argued the Bank of Canada has largely mimicked the behaviour of Selgin's hypothetical free-banking system over the last 20 years. See http://economics.uwo.ca/centres/epri/wp2005/Laidler_04.pdf<br /><br />Pedro BentoUnknownhttps://www.blogger.com/profile/10157532183094712816noreply@blogger.com