On maturity transformation:
Getting back to investment, investment is not an end in itself. That is, there has to be some optimum total amount of investment in any country for a given state of technological development, etc. And herein lies the big flaw in MT: it destroys or degrades the market’s system for optimising the total amount of borrowing and investment in a country. In fact it results in more borrowing and investment than is optimum, for reasons set out below.
There is an optimal supply of savings, at a price. There is an optimal amount of investment at a price.
There is not though, an optimal amount of anything without considering price.
What maturity transformation does is lower the price of investing without increasing the amount of saving being done. That is, it\’s that rarity, a free lunch. We are able to lower the cost (and thus increase the amount of) long term investments by transforming the maturity of short term savings.
Now, of course, it\’s not truly a free lunch, as this then leaves us open to runs on our financial system.
But the error in the original argument above is to consider \”optimal\” supply and or demand without considering price.