Re: [Pen-l] Liquidity trap

[Jim Devine <jdevine03@xxxxxxxxx>]

Charles Brown wrote:
> Does the current hesitancy of Wall Street banks to lend
> constitute some type of liquidity trap ?

yes. It fits both main theories, I believe. First, the nominal
interest rate is close to zero, which means it can't be pushed lower.
(Banks don't pay us to borrow.) That's the more popular view among
economists.

Second, as I understand it, there's been a massive "flight to quality"
(assets that can be trusted) and to liquidity (assets easy to sell),
where large numbers of institutions and individual are grabbing and
holding as many liquid assets (money, bank reserves, and T-bills) as
possible rather than holding other less liquid and riskier assets.
This says that as the FOMC puts more liquid assets into the system,
which would typically drive interest rates down, the extraordinary
demand for them keeps rates from falling. People are afraid that the
longer-term and less-liquid assets will suffer from capital losses,
either due to default or rising interest rates on them (which would
cause their prices to fall).

(Nowadays, T-bills are like money since they pay so little interest.)
-- 
Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your own
way and let people talk.) -- Karl, paraphrasing Dante.
_______________________________________________
pen-l mailing list
pen-l@xxxxxxxxxxxxxxxxxx
https://lists.csuchico.edu/mailman/listinfo/pen-l