MONEY, MACROECONOMICS AND KEYNES phần 4 potx

But the concept of finance did not fully address the problem of maturity mis￾matching from the productive investor’s perspective: due to the liability structure

of commercial banks, even if banks reduced their ‘liquidity preference’ and

agreed to extend credit to productive investors, these credits would be short term.4

This fact puts the long-term productive investor in a situation of high financial

exposure – any change in short-term rates of interest could lead to an unsustain￾able financial burden, and in the limit would turn once sound and profitable

investment opportunities into unprofitable investment projects. ‘Thus’, concluded

Keynes, ‘it is convenient to regard the twofold process [of investment finance and

funding] as the characteristic one’ (Keynes 1937: 217).

The question of the need for funding did force Keynes to make explicit two

important interrelated issues barely touched on in the General Theory. On the one

hand, the existence of mechanisms to finance, and in particular to fund investment,

was a condition for sustained growth of investment. On the other hand, this conclu￾sion forced him to make explicit the importance of the institutional setting (finan￾cial institutions and markets) for macroeconomic performance – a question that was

only appropriately dealt with in the ‘Treatise on Money’. That is our next topic.

3. The institutional background of Keynes’s

finance-funding circuit

There are two paradigmatic institutional structuring of the mechanisms of invest￾ment finance: the German universal banking, credit-based financial system

(CBFS) and the US market-based financial system (MBFS) – cf. Zysman (1983).

In the first case, universal banks manage maturity mismatches internally, that is

they issue bonds with different maturities in order to finance assets with distinct

maturities. The distinctive characteristics of the system lie in the high regulation

of German universal banks in order to avoid significant maturity mismatches, and

the revealed preference of the German public for bank bonds as a form of long￾term savings. In the US credit-based system, maturity mismatches are mitigated

by the existence of a myriad of financial institutions and markets specializing in

bonds and securities of different maturities and risks. As discussed in Studart

(1995–6), these institutional arrangements were the result of long historical

processes, often led by government policies, direct intervention or regulation.5

Even though MBFS is the institutional benchmark normally used to explain the

finance-funding circuit, there is no reason why other types of investment finance

schemas in distinct financial structures cannot be as macroeconomically efficient.

Indeed, distinct investment finance schemas present different advantages and

vulnerabilities.6 Table 8.1, based on Zysman (1983), presents three paradigmatic

cases.

It is quite clear that the US capital-market-based financial system is an inade￾quate picture of financial structures in most developing economies. As a matter

of fact, capital-market based systems are exceptions, rather than the norm, in the

developed as well as developing economies – restricted mainly to the USA and

FINANCIAL DEVELOPMENT, LIBERALIZATION AND GROWTH

71

the UK. Most economies which industrialized successfully (Japan and Germany,

to mention two of the most prominent cases7) did not possess developed capital

markets.

Credit-based financial systems (CBFS hereafter) can also be quite functional

in financing accumulation and sustaining growth, but they also do tend to have

vulnerabilities. In order to understand these, we must remember that, due to the

structure of the liabilities of deposit-tanking institutions (commercial banks,

mainly), they are usually suppliers of short-term loans. And, unless there are no

significant technical indivisibilities and the maturity of investment is very short,

expanding investment leads to higher levels of outstanding debt of the corporate

sector.8

In most developing countries, the typical investment finance mechanism

comprises public institutions using public funds and forced savings financing

long-term undertakings. Thus development banks and other public financial insti￾tutions were historically the institutional arrangements found to overcome market

failures in financial systems of such economies, failures which otherwise would

prevent them from achieving the levels of investment compatible with high levels

of economic growth. Such systems can also be highly functional in boosting

growth and promoting development, but, like any other systems, their robustness9

depends on certain important conditions. First of all, because investment finance

is mainly based on bank credit, banks tend to be highly leveraged – especially in

periods of sustained growth. The maintenance of stable (not necessarily negative)

borrowing rates is a condition for stability of the mechanisms to finance. Second,

in those economies where investment is financed mainly through the transfers of

fiscal resources, sustained growth is a condition for the stability of the funding

mechanisms too.

In sum, the existence of investment financing mechanisms (institutions and

market) for dealing with the problem of maturity mismatching in the context of

uncertainty is evidently a precondition for (financially) sustained economic

growth. Financial systems are a myriad of institutions and markets through which

such risks can be socialized. Their efficiency in sustaining growth has to do with

R. STUDART

72

Table 8.1 Patterns of development finance in different financial structures

Capital-market- Private credit- Public credit￾based financial based financial based financial

systems systems systems

Sources of long-term Direct Indirect Indirect

funds

Instruments Securities Bank loans Bank loans

Nature of the financial Private Private Public

institutions

Structure of the financial Segmented Concentrated Concentrated

system