Monday, March 26, 2012

two ways to bust the zero bind on negative real rates of interest

Trap



that is the usual zero binder graphicated

but ....
we all know you can raise the expected rate of inflation
to lower the reat rate of the safe rate
but how about raising the acceptable rate of default risk ?

ya ya ya
not compatible with a  profit max guided credit supply system

but ...
enter  a robust SBA  and high tech banking pair

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nb

obviously the risk premium is attached to non treausy issues
and to "manage " risky rates requires intervention in risky issue markets
however a public credit based set of banks could simply carry this portfolio of high risk loans at the optimal real rate (negative in extremo even ..if necessary)

the outcome of these new risky loans would be to reduce systemic risk by  generating the additional spending that powers a fast recovery and obviously a falling default rate on existing securitized loans