Tuesday, December 09, 2008

Right-size the financial sector while slowing down the pace of de-leveraging

In my opinion, the bailouts and rescues are not helping with either process.
More Arnold here:

Unfortunately, stuff happens. The bank may suffer a solvency shock, because of a really bad disease outbreak. Or, the bank may suffer a liquidity shock, because of an unusually high rate of withdrawals. It is easy imagine a slight solvency shock leading to a liquidity shock, because depositors may believe that the last one to withdraw will find that the bank is out of money.

If stuff happens, then the financial sector (the bank) will contract suddenly and sharply.

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