Tuesday, August 6, 2013

bagehot misses his circularity

Walter Bagehot on last resort lenind

  “lending freely"

" at a penalty rate"
"against good collateral"

it's penalty rate compared to what ?

an  assumed future path of nominal rates and inflation

"good collateral"

the value of the collateral  is entirely system state dependent

a CB can create a path of  rising collateral values
                   around its own flow of new credit