Lectures on Macroeconomics, No. 9
7th December 2008
Arnold Kling is doing a lecture series. They’re all good.
The nonfinancial sector wants to hold risk-free short-term assets and issue risky long-term liabilities. To accommodate this, the financial sector does the opposite. If the financial sector suddenly contracts, the nonfinancial sector gets stuck with an asset mix that is riskier and more long-term than it wants and a liability mix that is less risky and shorter term than it wants. The reaction to this unwanted mix can cause a recession. That is how the financial sector affects the real economy.
And that’s the best brief explanation of the subject that I’ve ever seen.