Monday, January 5, 2009

Raghu Rajan is a very smart guy

In 2005, he was heavily criticized for writing: If banks also face credit losses and there is uncertainty about where those losses are located, only the very few unimpeachable banks will receive the supply of liquidity fleeing other markets. If these banks also lose confidence in their liquidity-short brethren, the inter-bank market could freeze up, and one could well have a full blown financial crisis.
Paul Krugman has more on the same paper.
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