You really might try Friedrich List's description of banking and Alexander Hamilton's (see bibliography of my course list, which I think is being posted on pkt, or try
http://www.albany.edu/gspa/pos/syllabi/fall98/pos57198.html
I raise these old fogies for an important reason. Both were pro-capitalist, both were very smart representatives of local capitalist development, and both argued strenuosly for incentives for foreign investment. But they wanted it *adequately controlled.* List in particular gives detailed analysis of bank liquidity, foreign investment, and price levels. My point is that if you ask the normative question, is foreign investment a good thing or bad thing, you have to say from what point of view. Furthering capitalist development may not be a good idea if you're a Marxist; but Hamilton & List saw it as desirable.
To sum up: Short and long term cash flows can increase local banking system liquidity. But what it can do--and what it has done in Brazil--is create a situation where borrowing short in the foreign currency is used to lend long in the domestic currency. If the short money dries up and long assets have to be liquidated to cover short term obligations: economic contraction city. I don't think H&L would like that.
On the other hand, the situation is *extremely* messy. Short term borrowing is *also* used to finance short-term obligations, like paying your factory workers while the finished goods float on a boat to market. This "normal" volume of short-term borrowing is not functionally easy to dissociate from the borrow short/lend long crowd. Picture if you will a bank w/demand deposits and a mixed portfolio of long and short loans ranging from consumer and commercial credit to 30 year real estate. It is not necessarily a "sin" for a bank to lend long and borrow short (from its depositors). That is the essence of banking. But let's say that the short borrowing (depositors) dried up and the bank was forced to liqudiate its long obligations after first liquidiating its short ones. The "sin" is not necessarily in the ratio of long:short obligations of the bank: if you said that banks must have 1:1 reserve ratios of short:short oblligations, you are saying that the only form of bank is a money market mutual fund. So it is not the case that the bank "sinned" by lending long against short term liabilities.
Picture Brazil as a bank accepting short term liabilities and lending long (but also lending short): a kind of bank, viewed in the aggregate. The sin is not in having accepted short term liabilities nor even is the sin in having lent long against them. The problem is the "liquidity crunch" of a run on the bank. That is in fact what Brazil is faced with, caused by the problem of dealing in two currencies and a number of speculative instruments (notably hedged positiions in the US, with no relation to the Brazilian economy) designed to "protect against risk" (the wrong kind of risk).
There appear to me to be only two ways to deal with the problem. One is to make sure that you have a lender of last resort, moving national practice to the global scale. Faced with a crunch Braziul could draw upon unlimited borrowing and meet short term liabilities without liquidating long term positions. This would gradually ease panic, and a "run on the bank" could be stopped as people realized that they could "move in and out" of their short positions easily. If you follow this logic, you want to allocate big bucks to the IMF and work towards transforming it into a de facto lender of last resort.
Alternatively, you can make people borrow long in order to lend long. Do away with the intermediation function provided by financial institutions that borrow short and lend long. Capital controls are a way to do this. Tariffs are designed to insure that current account deficits stay in line with liquidity needs of the banking system. That is their real function. Everything else (the infant industry argument) is just window dressing by economists with a crude understanding of 19th century protectionist arguments. The tariff becomes a transaction tax designed to maintain banking system liquidity, and as such might be a worthwhile social insurance premium, rather than the "price distortion" derided by economists.
So, I suppose I am saying there are several potential solutions to the question you raise, and that short borrowing against long term obligations is not in and of itself a sin. The question is one of degree, of what institutional backups are in place, and what mix of alternative polices are in place (tariffs and capital controls) to mitigate the potential for downsides in a panic.
All of the above analysis assumes as "normal parameter" the usual economics of a world in which bourgeois competes against bourgeois. Class interests in the expansion of capitalism under these conditions have not been examined.
-gn John M. Legge wrote:
> Greg points out that extra-national demand for shares might raise the share
> price and make it easier for a company to raise debt. This clearly involves
> some very convoluted accounting: fixed interest lenders are supposed to look
> at cash flow and net assets rather than the share price. I concede that a
> high share price may make converting prefs more attractive and make keiretsu
> banks more liquid, but an excessively volatile share price may do nothing of
> the sort.
>
> We are now very aware of the downside of permitting unrestricted short term
> capital flows: is there any evidence of a real (as distinct from an if...
> then... perhaps... argument) benefit to the recipient of short term flows?
>
> John
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