Re: Starting Point

[Bruce McFarling <Bruce.McFarling@xxxxxxxxxxxxxxxx>]

>>> Gary Santos <evs@xxxxxxxxxxxx> 03/18/03 03:04pm
>>> "Because I'm still stuck on the paradigm that interest rates must reflect the risk in the economy at least on the long term. The future is too full of uncertainty for a zero interest rate. One has to set aside some money to answer for bad debts. Otherwise, we would have to keep on recapitalizing the banking sector. Or, merge it with the central bank."

It sounds to me like multiple interest rates are being conflated into a single interest rate.  The CB does not have to impose a cost on reserves lent to banks in order to cover the risk of their debt ... if they are not making enough money from their gross holdings to fund their operations, the government can make up the difference.

If we are talking about a flat yield curve dead on zero (!?), or at least a yield curve with too little income in it to yield a surplus to banks from which they can recapitalise, it seems like somebody somewhere is trying to push on a string.  I still think of a simplistic IS-BP curve with the IS curve hitting the axis to the left of the position of full employment.



--
Dr. Bruce R. McFarling
Lecturer in Economics & International Business
Newcastle Graduate School of Business
University of Newcastle
Callaghan NSW 2308
(02) 4921 7962 (W, voicemail)
(02) 4921 7398 (FAX)