Twofish's Blog

February 13, 2009

Broken markets

Filed under: china, finance — twofish @ 10:30 am

This also is why the standard argument against the stimulus package is wrong. The idea is that there is a fixed amount of lending and that if the government increasing borrowing then there will be less private borrowing, so the stimulus does nothing except increase public debt.

The argument would be correct if we had functioning financial markets that were already allocating capital to maximize efficiency, but we don’t. The markets (particularly the securitization markets) are broken and are simply not responding to interest rate signals. From an interest rate point of view it makes no sense for people to be buying massive amounts of T-bills, but they still are.

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