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The Legitimacy of Loan Maturity Mismatching: A Risky, but not Fraudulent, Undertaking

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  • Philipp Bagus
  • David Howden

Abstract

Barnett and Block (2008) attack the heart of modern banking by claiming that the practice of borrowing short and lending long is illicit. While their claim of illegitimacy concerning fractional reserve banking can be defended, their justification lacks substance. Their claim is herein strengthened by a legal analysis of deposits and loans based on Huerta de Soto (2006). A combined legal and economic analysis shows that while lending deposits can be regarded as illicit, the maturity mismatching of loans is legitimate contrary to Barnett and Block's claim. No over-issuance of property rights is involved with this practice once the distinction between present and future goods is taken into account. However, while the practice is not illicit per se, it is greatly assisted and developed through the presence of a fractional reserve banking system, and can sometimes breed detrimental effects.
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Suggested Citation

  • Philipp Bagus & David Howden, 2009. "The Legitimacy of Loan Maturity Mismatching: A Risky, but not Fraudulent, Undertaking," Journal of Business Ethics, Springer, vol. 90(3), pages 399-406, December.
    • Handle: RePEc:kap:jbuset:v:90:y:2009:i:3:p:399-406
    DOI: 10.1007/s10551-009-0050-z
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    References listed on IDEAS

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    1. Hoppe, Hans-Hermann, 1994. "How Is Fiat Money Possible?--or, the Devolution of Money and Credit," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 7(2), pages 49-74.
    2. repec:ucp:bkecon:9780226320625 is not listed on IDEAS
    3. de Soto, Jesus Huerta, 1995. "A Critical Analysis of Central Banks and Fractional-Reserve Free Banking from the Austrian School Perspective," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 8(2), pages 25-38.
    4. Philipp Bagus, 2008. "Monetary policy as bad medicine: The volatile relationship between business cycles and asset prices," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 21(4), pages 283-300, December.
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    More about this item

    Keywords

    time deposits; private property rights; fraud; maturity mismatching; fractional reserve banking;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E59 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Other
    • P16 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State

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