Ellen Frank wrote:
>
> <snip>
> ...aren't these
> market connected via the responses of financial
> players?
I should hope so. Isn't everything connected to everything else in an
advanced capitalist economy? But the point of theory is to abstract from
some connections in order to emphasize others as more important.
> Right now, for example, a 6-month commercial
> bill is paying nearly 6%? Does this not impact the willingness
> of institutional investors to lend long-term, where the rate
> is only 7.5%, but the risks much greater?
If you think long rates are coming down because of reckless experiments by
a finance ministry trying to perpetuate a political regime, then you would
want to lock in the 7.5 percent right now, i.e., it is more risky to get
caught in commercial paper that matures in 6 months when you'll have to
roll it over at less than 7.5 percent, right?
> Does Keynes'
> theory of liquidity preference matter?
Mainstream monetary theorists construct models that combine loanable funds
theory with liquidity preference theory. These models more than anything
else mark the difference between Keynes' General Theory and Bastard
Keynesianism, Neo Keynesianism, New Keynesianism, etc., because Keynes
intended liquidity preference theory as an alternative to loanable funds
theory (which he rejected). Liquidity preference theory itself seems of
dubious value, since it was designed to complement an exogenous money
supply. Combining it with an endogenous money supply seems contorted
compared with just starting over with a different theory, based in Marxist
theory perhaps?
> I seem to recall that
> back in the mid-90's, when the Fed pushed short-rates up
> over 6%, there was a flight to paper and a terrible
> credit crunch as a result.
>
I don't recall a terrible credit crunch during the Fed's tightening in
1994-95, at least not on a scale comparable to the credit crunch of
1990-91, which caused a recession. But maybe I'm missing something because
I'm not sure what "flight to paper" means.
Edwin (Tom) Dickens
