Ellen Frank wrote:
>But why should a bank deposit find its way into the real economy?
>What if the bank hoards it? Isn't this exactly what happens during
>credit crunches when banks try to raise their capital and reserve
>ratios?
In the 1970s and 1980s, U.S. banks had about 20% of their assets in
commercial & industrial loans. During the depths of the early 1990s
credit crunch, that fell to around 17%. It's back over 18% now. So
we're talking a few percentage points of change, but not a massive
shift.
What the Fed calls "core loans" - C&I, real estate, and consumer -
accounted for about 50% of bank assets in the 1970s and 1980s; it's
around 54% now. So even in a crunch, lots of bank deposits find their
way into the real economy.
>I don't think Keynes assumed the same people were deciding
>between paper and real investments.
Keynes wrote in "The General Theory of Employment" (CW, v. 14, p.
117) that after parting with a hoard, an investor has the choice
between lending "at the current rate of money interest or he can
purchase some kind of capital asset." He argued in the GT (pp.
150-151) that unlike days of owner-entrepreneur, for whom decisions
were "largely irrevocable...the separation of ownership and
management...and the development of organized investment markets"
adds a new feature: the individual (though not the community as a
whole) has the freedom to "revise his commitments. It is as though a
farmer, having tapped his barometer after breakfast, could decide to
remove his capital from the farming business between 10 and 11 in the
morning and reconsider whether he should return to it later in the
week." Ten pages later, he wrote that it might be a good idea to make
a stock purchase "indissoluble, like a marriage" [ha!]. But illiquidy
will make investors nervous about commitment as long as there's a
liquid alternative. "So long as it is open to the individual to
employ his wealth in hoarding or lending money, the alternative of
purchasing actual capital assets cannot be rendered sufficiently
attractive (especially to a man who does not manage the capital
assets and knows very little about them), except by organising
markets wherein these assets can be easily realized for money."
On p. 174, he wrote that interest was not the reward for "not
spending" but for "not hoarding." So a bank deposit isn't a hoard by
this defintion. Then what is?
> Keynes was pretty
>clear in the General Theory on the distinction between what
>he called rentiers and entreprenuers. The problem, as he described
>it, is that rentiers want high returns and liquidity and control
>not only the flow of new savings into financial markets,
>but also the form in which existing wealth is held. If they
>become spooked and try to liquidate wealth -- as in a stock
>market crash -- this means that entreprenuers will be unable
>to obtain financing.
But the stock market isn't an important source of business finance,
which Keynes seemed to know at some points and forget at others. (He
pointed out as early as the Treatise on Money that S and I were done
by different sets of people.) I think the market crash's effect on
real investment is not on the availability of funds but on the state
of confidence: "The state of confidence, as they term it, is a matter
to which practical men always pay the closest and most anxious
attention. But economists have not analyzed it carefully and have
been content, as a rule, to discuss it in general terms" (GT p. 148).
Doug
