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Please let us know if they post a video online. Thanks!

Mankiws discussion is, typically, thoughtful and evenhanded. I am certainly not an expert on financial markets so maybe I am missing something obvious. However, I am puzzled as to why he does not make the connection between "easy money," a sudden decrease in the risk to banks of holding mortgages, and a housing bubble.

"To begin with, Alan refers to recent events in the housing market as a “classic euphoric bubble.” He is certainly right that asset markets can depart from apparent fundamentals in ways that are often hard to understand."

The housing bubble is not difficult to understand. Americans have widely used real estate as an investment tool for over half a century. When banks give out more mortgages, housing demand increases, it is impossible to know that this does not signal a long-term shift in the demand for houses, but is a response to a temporary increase in funds. These are all the ingredients needed for a bubble.

Mankiw even recognizes the dangers associated with easy money in the banking industry. "Going forward, creditors to these institutions will view them as too safe, and so they will lend to them too freely. The financial institutions, in turn, will be tempted to respond to their low cost of debt by leveraging to excess." So why doesn't he see it as it happened starting in 2001?

He deals with a very interesting issue for Austrians.

"I think it is possible to imagine a bank with almost no leverage at all. Suppose we were to require banks to hold 100 percent reserves against demand deposits
One thing such a system would do is forgo the “maturity transformation” function of the current financial system. That is, many banks and other intermediaries now borrow short and lend long. The issue I am wrestling with is whether this maturity transformation is a crucial feature of a successful financial system. The resulting maturity mismatch seems to be a central element of banking panics and financial crises. The open question in my mind is what value it has and whether the benefits of our current highly leveraged financial system exceed the all-too-obvious costs."

Is Mankiw starting to think about what Austrian economists have been warning about for decades?

One of Ludwig von Mises' clearest statements on the "maturity" problem was in a 1933 article on, "Senior's Lectures on Monetary Problems," which appeared in the "Economic Journal" (September 1933):

"Deposits subject to cheques and savings deposits are two entirely different things. The saver wishes to entrust his money for a longer period; he wishes to get interest. The bank that receives his money has to lend it to business. A withdrawal of the money entrusted to it by the saver can only take place in the same measure as the bank is able to get back the money it has lent. As the total amount of the saving deposits is working in the country’s business, a total withdrawal is not possible. The individual saver can get back his money from the bank, but not all savers at the same time. That does not mean that the bank is unsound. It does not become unsound until the banks explicitly or tacitly promise what they cannot perform: to pay back the savings at call or at short notice.

"The deposits subject to cheques have a different purpose. They are the businessman’s cash like coins and bank notes. The depositor intends to dispose of them day by day. He does not demand interest, or at least he would entrust the money to the bank even without interest. The bank, to be sure, could not earn anything if it were to hold the whole amount of these deposits available. It has to lend the money as short notice to business. If all depositors simultaneously were to ask their deposits back, it could not meet the demand. This fact that a bank which issues notes or receives deposits subject to cheque cannot hold the total amount corresponding to the notes in circulation and to the deposits in its vaults, and therefore can never redeem at once the total amount of its liabilities of this kind, is the knotty problem of banking policy. It is the consideration of this difficulty that has to govern the credit policy of the banks that issue notes or receive deposits subject to cheque. It is this consideration that led to the legislation that limits the issue of bank notes and imposes on the central banks the retention of a reserve fund of a certain magnitude.

"But the case of the savings deposits is different. Since the saver does not need the deposited sum at call or short notice it I not necessary that the savings bank and the other banks that take over such deposits should promise repayment at call or short notice. Nevertheless, this is what they did. And so they became exposed to the dangers of a panic. They would not have run this danger, if they had accepted saving deposits only on condition that withdrawal must be notified some months ahead.”

[Reprinted in, Richard M. Ebeling, ed., "Money, Method, and the Market Process: Essays by Ludwig von Mises" (Norwell, MA: Kluwer Academic Press, 1990) pp. 104-109]

Richard Ebeling

I have followed all things that you said. Thanks.

Is it possible to find an mp3 or .pdf version of prof. Cowen lecture?
Thanks in advance

They would not have run this danger, if they had accepted saving deposits only on condition that withdrawal must be notified some months ahead.

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