Backwards Liquidity Transformation

One of the primary functions of the financial system is “liquidity transformation.” You want to put money in a bank account where it will get some return, but you also want to be able to pull the money out whenever you want to go buy that new PS 3. But a businessman wants some working capital that’s not going to vanish on him without warning. So banks pay depositors skimpy interest rates for money, offering liquidity in exchange. Then they rent the money out at a higher price but on a longer term. This makes banks vulnerable to runs, yadda yadda yadda, you know the story.

But is it really true that, as a rule, households are desperate to lend short and firms want to borrow long? What about saving for retirement. People my age will be eligible for Social Security when we turn 67. And I won’t turn 67 for another 37 years. Yet I’ve been in the workforce saving at least a token amount for retirement since the age of 22, and many people enter the workforce earlier than that. If you pooled up all the retirement savings of everyone who’s at least 20 years from retirement, you’d have a pretty giant pool of “patient capital.” And the vast majority of fixed business investment has to have a useful lifespan of less than 20 years. So where’s the financial intermediation to help connect households who want to lend long with firms who want to borrow (relatively) short?