In a recent article, Boucekkine et al. (2004) convincingly argue that the analysis of the relationship between demographic and economic trends should be built on a rigorous modeling of the specific decisions of the various cohorts that compose a population. Overlapping generations models, which feature an explicit age structure of the population, are hence the natural tool for studying the impact of demographic changes on individual decisions and aggregate economic variables.
The first model with overlapping generations developed in literature (Allais 1947, Samuelson, 1958 and Diamond, 1965) only involves two coexisting generations at each point of time, meaning that the length of a period is about thirty years.
The banking literature commonly characterizes loans as illiquid assets. The lender is assumed to possess relationship-specific skills and/or information that preclude the efficient trading of loans in secondary markets where they would compete with public securities. This characterization helps us to understand the nature of banking, yet it is a simplification of reality. Loans have never been absolutely illiquid. Correspondent banks traditionally have been able to effect portfolio re-balancing by exchanging assets as long as the relationship between buyer and seller was strong enough to generate sufficient trust to mitigate informational asymmetries between them. Loan sales by bankruptcy trustees have long been a part of winding up failed banks. The marketability of bank loans, then, is a question of degree. Today, that degree is rapidly increasing.
Banking is an information industry so it is not surprising that the 1990s revolution in information technology fundamentally affected banking. At the strategic level, leaders of the top banks around the world are unanimous that their models of business are undergoing substantial change. Secondary market loan trading has also developed radically. Legal changes set the stage for standardization of loan trading and a rapid rise in trading volumes. The Loan Syndication and Trading Association has been set up to facilitate this process. Bond rating agencies are now rating syndicated loans.
Writing back in 1873, Walter Bagehot made the observation that since “our credit system [is] much more delicate at some times than at others .. panics come according to a fixed rule, [so] that every ten years or so we must have one of them”.
The dramatic events of the last two years have forced us to reconsider some of the fundamental questions that preoccupied Bagehot and his contemporary financial economists: is a periodic crisis an inherent property of a competitive financial market? Is financial crisis a market failure? If so, what kind of policies should be implemented in order to diminish the social cost? Lastly, is neoclassical economics capable of providing a framework for the analysis of these questions?
