Thursday, July 05, 2012

About That Banking System

While I tend to be in the "give free money out...even to the banksters if that's the only option" camp, I don't think enough people - other than me! - have been making the point that it's madness to expect our banking system to be the savior of the economy. Our lovely models tell us that our competitive banking system is an intermediary which allocates capital efficiently. In practice, of course, they're corrupt skimmers who neither allocate capital nor risk efficiently. We, you know, have some recent evidence of that.

So, yes, in absence of anything else expansionary monetary policy is probably a good thing. At the very least it communicates that the people in charge might understand that there's a wee problem with the economy. But we need to remember that we're trying to save the economy with the banks we have, not the banks in the textbooks.