Simon Wren-Lewis and Nick Rowe Annoy Each Other…: Friday Focus for August 1, 2014 by DeLong

...In the case of (2), the key shortage is not of the stock of the liquid medium exchange per se or an elevation of the entire risk spectrum of real interest rates above the Wicksellian natural rate because of the zero lower bound, but rather the inability of financial intermediaries to raise enough capital and trust to do the risk transformation. The consequence is safe interest rates at or below their first-best Wicksellian natural values and risky interest rates well above their first-best Wicksellian natural values. In this case a resort to monetary expansion–even if the economy is away from its zero interest-rate lower bound–provides incentives to invest too much of society’s wealth in long-duration assets, with the added complication that the financial sector has a difficult time distinguishing A valid long-duration asset from a Ponzi scheme because neither requires the investors be shown the money in any serious way.