Thursday, December 2, 2010

Michael Woodford works hard

He does some research on banking through the crisis. The key chart is figure five, showing interest rates and rate spreads over time. Click through and locate figure five. Everybody ready? OK

First, the central banks short term rate was within six months of tracking a rapid economic change, not bad for socialist banking. Second, the spike in the spreads that occurred indicates there were too many intermediate bankers and not enough intermediate deposit flow, parts of the banking system were going to negative inventory levels.

All in all, a standard banking system going into a contraction in order to build up inventories, probably in response to a sudden constraint in some essential 3 dimensional good.

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