Banks, government, and Modigliani-Miller

posted by
June 13, 2011
by Arnold Kling  
Posted in Commentary

"As I have said many times, as individuals we want to issue risky long-term liabilities (long-term mortgages, shares in fruit trees) and hold riskless short-term assets (demand deposits). Financial firms accommodate this desire by doing the reverse. Up to a point, they can accomplish this through diversification, asset selection, and asset management. But beyond that point, they get away with signaling. When they get too good at signaling, they expand too much, leading to a buildup of risk. Governments are similar to banks in this respect." (06/13/11)  

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