Comment on Menzie Chinn's recent Econobrowser post

Menzie preset the LM/IS model for the banking sector under some asymmetric information shocks. I leave my comments here.

The post related to the general problem of restartig the baks to restart the economy. I will just give a quick analyisis using the natural yield curgve.

Investment houses need to operate at all the important term points in the natural yield curve, to minimize risk and volatility. When the consumer model unexpectedly changes, the new production model is not yet a complete market. Hence, the investors need to await stronger market signals. During this adjustment period volatility and risk are high because the lack of investment houses operating near the new production cannot smooth the risk function between short and long term investments. All economic sectors would respond the same to consumer equilibrium shifts.

In particular, a deflationary spiral occurs when the new consumption model is restricted by some government restrictions on a critical public good. This is the case in which underground economic production increases. The deflation continues and government revenue reduces until the resource restriction beomes obvious and government must general deregulate the resource.