In this rather long post Brad (who writes faster than most people can read causing potentially inefficient fixed pixel formation) Brad spends an odd amount of time critiquing some neo-Austrian and Singer the inflation truther.

But then he discusses the thoughts Bernanke and Summers, which are well worth discussing.

Ben Bernanke says that there is a:

risk… that rates will remain low…. [For] in an environment of persistently low returns, incentives may grow for some investors to engage in an unsafe ‘reach for yield'…. [The alternative risk that] rates will rise sharply…. The two risks may very well be mutually reinforcing…

Here I think it is important (in the context of the rest of the post) that when Bernanke writes “investors” he is thinking of financiers not people who engage in Physical investment as defined in the national income and product accounts. Basically he is worried about bankers and pension fund managers. I agree with Brad that:

It seems to be very clear that prudential regulation rather than interest-rate manipulation is overwhelmingly the proper tool to deal with Ponzi finance, irrational or near-rational, and with systemic risk created by too much “reaching for yield”.

But fools and agents with incentive contracts written by fools reaching for yield by picking up pennies in front of a steam roller have created problems. The incentives created by fools can include that it isn't good enough to maximize this years profits if the maximum is less than zero, so if the expected value of profits must be zero, gamble because its the only way to have a chance to keep your job.

So Bernanke (and Jeremy Stein et al) have a bit of a point.

Then we move to “Larry Summers” who is paraphrased.

And Larry Summers will say that if the problem is the collapse of the credit channel–the inability of a market in which participants have impaired balance sheets to properly mobilize the risk-bearing capacity of society in order to finance enterprise–the first-best answer cannot be pushing down the long-run rate of interest and so providing extraordinary incentives to invest in long-duration projects. That would produce an economy with (a) too-few risky short- and medium-term enterprises, (b) a too-high duration capital stock, and (c) too-much near-rational Ponzi finance. Much better to either (a) fix the balance-sheet problems and restore the risk-bearing capacity mobilizing power of the credit channel, or (b) failing that using the government as a financial intermediary to mobilize the taxpayers' risk-bearing capacity when private finance cannot mobilize investors'.