Bankers and low interest rates

Macro and Other Musings discovers an excellent paper on low interest rates and bank risk.

Basically, they talk of low interest rates meaning low short term interest rates. In a production model, these interest rates reflect growth of retail inventories, and low interest rates cause producers to borrow this money for production, borrowing from the consumer's pot. What we have is an example of supply chain interference that result in channel distortion. Low interest rates imply a deflated state, fewer stages of production. Some investment banks and producers continue to act as if in an inflated state.

To decorrelate the banking and production chains, part of the low interest borrowing are designated for Kelly trades, trades designed to bet against oneself, thus covering the quantization error.

The optimum banker strategy is simple, compute the quantum short term period (longer in a deflated state), then compute the target interest rate before market action. Then sell or buy bank notes in the new, longer short term structure. Use standard statistical equalization theory to get a short term rate that makes a normal curve (trying to account for negative terms).

Well, or else, just decommission centralized banking.

In other words, target the banker's term structure as a finite dimensional production line. In a severely constrained economy, target a term structure looking like the goods term structure of the constrained goods. Constrained goods always hold the most information about the future.