Keynes’s liquidity preference theory touched on the maturity transformation issue. He argued that the private sector’s willingness to assume liquidity and maturity risks is not well-anchored in fundamentals. Instead it is strongly influenced by subjective factors. Hence his policy prescription was that government debt issuance should “accommodate the preferences of the public for different maturities”. It was, he argued, socially desirable that risk-averse investors should be offered some minimum, safe return on their capital. The real long-term rate of interest should not go to zero. Equally, it should not be too high. Keynes’s view was that, in periods of extreme.
