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March 08, 2011



Thanks for the comments.

You're not far off on the "small is beautiful" bias. I'm not usually in favour of ad-hoc size restrictions but an economic system where creative destruction operates as it should would have a much less concentrated banking sector IMO. The problem right now is that "letting the system burn" after a prolonged period of stabilisation risks complete collapse, hence the need for interim ad-hoc measures to restore resilience. However, the more I think about it, the less optimistic I am that anything will be done till the point of collapse arrives.

On interest rates, I think Raghu Rajan has it right. It's the commitment to lower rates whenever economic agents (esp. banks) are in trouble that does the damage. Again, this sort of moral hazard argument isn't that far removed from the fragility that comes from stabilising actions in ecosystems.

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