The Role of Banks in the Economy: Liquidity, Investment, and Credit Markets
The agents prefer to achieve their goals sooner rather than later (time preference). Logically, if they want this, also valued means to enable them meet the purposes above, ie, they prefer present goods to future goods, which already exist they do not yet exist.
They tend to hoard money to meet the needs in each moment.
The actors may give up liquidity in exchange for profitability.
There are many types of business investment.
A specific way of investment of this money, lend money to another person, which is returned with some interest.
The yield is the interest between what you paid.
For this reason the credit markets emerge money, which consist in giving up this money in exchange for future money. This can be seen from two perspectives: from the debtor (to whom you provide), or from the lender (the lender).
Since the debtor arises how much it costs to pay a sum of money after a while. If hoards and not spent, the cost comes from the excess interest rate, it cost money to buy this.
From the investor, deal with how much money it cost to buy the future, it costs money to give up today. In excess, which the debtor is a cost to the investor is a return.
The interest rate is present in all markets and all commodities, because it is a market phenomenon. It’s a category that depends on time preference.
It tends to impose a uniform rate of return, the same can be said of credit markets.
Both investment and the prevailing credit market yield curve, which is a graphical representation of the relationship between profitability (annual) investment and its term. It is an exponential. A longer, more interest.
There can be no investment without savings.
The employer picks those savings and invest it.
As it is impossible that everyone increase their present property, means that people are resigned to increase them.
The decisions of saving, investment and consumption taken by agents determine the production structure of society.
How and why banks arise
The money can be spent, to hoard or invest. Expenditures and hoarding on the one hand, investment by another.
If there is something in economics because it has advantages over as they did before. The banks are related to money, and if present is because they have advantages over these two uses of money where there are no banks.
Advantages of the banks about this business
Lighten or transportation costs (if I take a kilo of gold the bank gives me an equivalent role that I can keep in your pocket). But does not explain all the advantages of a bank to manage money as a medium of exchange. This requires a return to Tema2.
The most liquid of all good is gold, both historically and by its properties, but does not mean that no other property with him almost as liquid. One such as liquid assets, are all consumer goods in the economy urgently demanded and already being sold to consumers.
There is a subset of consumer goods that society is going to buy it or another. Meets the first property of the money (strong demand). This property is satisfied in a very short period of time, so no need to hoard.
This subset is as a preliminary step, very short time, to take gold. The problem of these assets to act as money is that they are very heterogeneous and have a very different value. The solution has historically emerged to be of use as money is to express its value in gold (the entire subset of goods, much is gold).
The employer may issue a voucher for the value of that commodity, so you can buy other goods. This system of promissory notes in gold has two problems: the assets are illiquid because they are being sold, but the ticket has not been established (may be something in the store long, and this is no longer liquid) requires that people who have vouchers issued an invoice (bill of exchange: outstanding bill in general, From a wholesaler to a retailer, supplier to customer), reflects an actual transaction, and the retailer signs the bill, which acknowledges that obligation. It is the acceptance of bills of exchange. Bills of exchange accepted and fought against actual transactions (commercial bills accepted), circulated as money, the other problem concerns the knowledge that, in effect, such property is in urgent need. Consumer goods should be known with certainty is sold in 30, 60 or 90 days. These assets are susceptible to being used as money. Not all goods are evident. There is a mathematical rule to learn when they sell, depending on the particular circumstances of the market. For precisely this detail is emerging as the banks, because there is no objective rule to determine if an object has or not an exit. The banks appear as a discriminator of liquidity. The bank buys bills of exchange, and buy value whether the bill of exchange is issued to an actual transaction (business letter) and not financial, and judged whether the commodity is liquid or not (whether to sell fast or no).
The bank buys bills of exchange, by discounting bills of exchange (point deducted). The point is deducted through banknotes. Purchase bill of exchange and issue tickets.
The bank note is an obligation to the view (if I have the ticket to the bank must give me at that time) of the bank to pay gold. It’s the debt that improves the quality of bills of exchange. Transforms debt of unknown quality / doubtful debt of proven quality.
Bank liquid that has the capacity to meet all its obligations.
The debt in sight were two: notes and bank deposits, which are exactly the same.
The ticket is not really money, is a debt to pay money view. But if they circulate as money.
The notes demonstrate that certain bills of exchange are liquid, so the company prefers to have a company that discriminates between liquid and illiquid assets.
It allows socially offset credits and debts.
Bank notes of other banks. The debt of each bank is different, each bank has its debt. The bank notes can be exchanged if they are sufficiently liquid.
Tickets can be issued indefinitely if they are adequately supported, have quality bills of exchange and debts payable on demand.
These are the advantages of using banks as a medium of exchange, are discriminators of liquidity.
Banks have advantages in using money as an investment:
o The bank has dispersed funds. As you reach the bank savings of many people, it can allocate that money to buy bonds and profit.
or very good at controlling the risks. Know what investments are solvent and which are not. The bank competes with other financial institutions. The bank charges a brokerage margin.
The maturity of debts and credits is the same, so the debts are paid with credits.
The banks that issued notes were called discount houses.
The tasks should be made by separate departments.
Commercial banking issues debt to an interest rate of 0, and invests in bills of exchange whose performance is very low.
The banking firm has to pay very high interest rates to attract savings.
It invests in short-term debt to long term projects.
There is a maturity mismatch, from the economic point of view is going to be investing money that is not saving. Traders suffer a deterioration in its liquidity.
The bank thinks it can pay off a debt by borrowing money (short-term financing). This strategy is called roll-over. That if a bank does not have much problem isolated.
Fractional reserve. Volume of reserves divided by debt. Liquid assets (they are only a fraction of the debts you have short-term bank) that has a bank to meet its short term obligations.
The illiquidity of a bank moves to another.
It attempts to justify the disconnecting of the banks. Working capital of banks is very negative.
Theory marketability of assets
Negotiable
That I can break off of assets with little loss of value. If the asset portfolios of banks are negotiable, when they come to withdraw their deposits, they only have to sell or borrow. What is relevant is the bank’s ability to convert their liquid assets without loss of value.
Problem: afalacia falls into a logic of composition, which states that believe that what can be done individually a part of the system can carry out the whole system.
AC> AI
FP> DLP> DCP
AC-current assets.
AI-fixed assets.
FP-equity.
DLP-term debt.
DCP-short-term debt.
For the situation to improve the relationship should be reversed.
Society as a whole can not improve the situation in a given time.
The lending limit is a voluntary: each time a loan, a bank becomes illiquid, the spread of gold is what the bank has to cope with their debts. Not to go into receivership autorestringen banks not to continue lending money. If you set a quantitative limit, known as minimum reserves.
r = gold / tickets
This limit, in principle, the bank chooses. If we reverse the ratio:
M = 1 / r (banking multiplier)
It is many times can create credit on reservations they have.
Example:
r = 10%
M = 1 / 0, 1 = 10 can create money on stocks you have.
Currently banks are forced to have minimum reserves (2% of tickets on all deposits at its disposal). And the bank can multiply the number of tickets by 50 tanks. ? M = 1 / 0, 02 = 50.
r is or discretion of the bank to manage liquidity.
More important is the quality criterion.
The other boundary is a forced limit, which does not depend on his will, is enforced by the system is unable to do so. It has a dual phase:
1.The government introduced legal tender laws. It requires that tickets are accepted by their nominal (if you put 100 which is accepted by 100). But the bad money drives out good and just circulate the money in the bank liquid. This system makes liquid banks disappear because there is only one note in circulation. They stayed the banks that had good relations with the government, benefiting quite the two (central banks)
. And gives a bank the privilege of note issue monopoly, as are legal tender, the whole world has to accept. The State is likely to put interest because its debt to the bank. The problem is that prices rise is inflation, and reflects that the bank note loses value because the bank is illiquid. It is a consequence of the illiquidity of the bank, of forcing me to accept this bill and its face value and are issued new notes (although in reality is a result derived).
Another consequence is that there is a drop-term extension cable market interest rate.