Wednesday, June 10, 2009

Thoughts on investment and inflation

[I didn't Cc the blog on this originally last week but now I've changed my mind because I think it's important.]
From a co-worker of mine, some interesting thoughts. Emphasis added.
Maturity mismatch is the main purpose of the modern banking business existence! Normal people are presumed to be unwilling to lend money to someone for more than one year, yet the industry needs this sort of loans. The banks therefore borrow short and loan long, lying to depositors about being able to return their deposits on time. The FDIC is there to instill confidence in the lies. [snip]
Back when we did not have the bond  market what banks were doing was justifiable – in order to finance the industry somebody had to pry the savings away from populace, evaluate risks and borrow out the funds. Now there is simply no excuse for this anymore – people should invest their savings directly or via special vehicles (e.g. mutual funds) with explicit understanding of commitment terms and risk levels instead of the vague "magic FDIC will save me!". Maturity transformation is steroidal and we're well into "drug abuse" territory.
On a related note, people should not be using fiat currency as a store of value, because doing so is implicitly transforming the responsibility for investment management from the individual to the state. It's wrong for the same reason that maturity transformation is wrong – people surrender responsibility for managing their wealth without knowing they did so. (Hoarding hard currency is fine since you are explicitly committing to invest into gold or silver commodity).
Interesting way of thinking about it, no?
Rock Is Dead. Long Live Scissors!
"The presentation or 'gift' of the Holy Ghost simply confers upon a man the right to receive at any time, when he is worthy of it and desires it, the power and light of truth of the Holy Ghost, although he may often be left to his own spirit and judgment." --Joseph F. Smith (manual, p. 69)

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