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Date: | Fri Mar 31 17:18:37 2006 |
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Mary Schweitzer writes:
"Regarding financial intermediation:
Focusing simply on the level of savings and concurrent bank
activities misses an important engine in the history of finance --
financial innovation.
The shift into modern rates of growth in the U.S. sometime
around the 1810s or 1820s was preceded by a profound restructuring
of financial institutions and markets. As reducing transportation
costs benefits both consumer and producer, so too reducing costs
of financial intermediation benefits those who would fall into
far different categories if you stuck to the rigid box category
interpretations of macro growth."
You still need to be cognizant of the impact of innovation on the
balance sheet of banks. Successful innovation reduces the cost of
financial intermediation as well as introduces other financial
products in the market place. For example, the ATM technology
reduces the (labor) cost of banking while it increases deposits from
customers. Deposits increase because customers reduce their
desired cash-deposit ratios. Thus for the economy, more purchasing
power is made available for borrowers (possibly at a cheaper cost),
and more investment spending also takes place. Again we see the
logical prior of savings over investment spending.
I shall resist the temptation from Mary and some others to engage in
a debate over redistributive or leftist ideology. Not because I
can't (and don't in other contexts; for a teaser, remember the 10th
of the Ten Commandments, or "Suggestions?"), but because that will
detract from the issue at hand: how do we go about doing "proof in
economics", and whether worrying about the fundamentals would not be
a more worthwhile endeavor than evaluating econometrics results or
models. So far, I think Larry Moss's point has well been confirmed.
If we can't even agree on what is meant by investment and how it is
financed, what's the point checking for levels of statistical
significance, cointegration, etc.? As my last econometrics professor
used to warn, "garbage in, garbage out!"
James Ahiakpor
CSUH, Hayward
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