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Mismatch, root of all trouble

Financing long-term loans with short-term deposits is called maturity mismatch. To be clear, assets and liabilities should have similar maturities. But when we see 20 years-loans financed by 6 months-deposits, what we have is a confidence deficit. And its main reason is that taxes are increasingly burdensome. Of course, afterwards authorities try to rebalance the fiscal burden by cutting interest rates. But this small interest rates policy favors banks’ debtors. And not them, but depositors are the problem.

Affected by tax increases, savers stop depositing money at the banks. Moreover, they withdraw their deposits to pay the increased taxes. So deposits become more and more short-term, while loans keep their long maturities. That’s how maturity mismatch appears. Bad policies hamper the necessary rebalancing. For this reason, stagnation lasts longer and the recession risk rears again its ugly head.

Mismatch is an old and global problem. In the US free-banking era, maturity mismatch was the main reason central banks were created, as lenders of last resort. But central banks’ liquidity injections didn’t solve the problem, because their maturity was still shorter than that of the loans on the banks’ books. Neither imposing to banks to buy risk-free Treasuries was a solution. That’s why all the economy manuals say you mustn’t increase taxes in a crisis, because in this way you erode confidence. Sovereign credit ratings have nothing to do with corruption levels, nor with budgetary balance. 

Politicians should have all the incentives to solve the crisis. But instead of reducing taxes, they try to artificially boost confidence by creating a European banking union. And they don’t have the necessary expertise to see the risks and dangers of such a project, including the risk of corruption that always comes with politics. That’s why sovereign bonds shouldn’t be seen as being risk-free, because these securities finance public investments, burdened by lack of efficiency and corruption, and economically unhealthy. These flaws don’t influence the borrowing costs because they don’t reflect into the sovereign ratings.

Inflation is taxation without legislation, said Milton Friedman. He could have said that it’s a form of intentionally-induced impoverishment, by means of maturity mismatch. Politicians create maturity mismatch when the economy is booming. One good example is the Tăriceanu regime, who acted (and spent) like the Romanian economy was already some sort of ‘‘eastern tiger’’. Afterwards, the imbalances were treated with inflation and other forms of loss socializing. And the thrifty footed the bill, being ‘’rewarded’’ with ever lower interest rates for their savings by the banks who took their deposits as liabilities.

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