Charles Brown writes: >> Does the current hesitancy of Wall Street banks to lend >> constitute some type of liquidity trap ?
A "liquidity trap" implies, to me, an irrational decision not to borrow and lend based upon prevailing interest rates. After an extended credit bubble, the overall market is deleveraging, i.e. reducing indebtedness. Leveraged consumers presently not demanding loans and trying to reduce indebtedness is not irrational. Banks changing credit policies to make loans only to solvent borrowers that will be repaid is not irrational. Insolvent banks holding on to cash instead of loaning it out in order to address creditor and depositor demands is not irrational. Businesses projecting slower consumer demand and therefore reducing borrowing is not irrational. There is no liquidity trap -- the market is shouting at the top of its lungs it wants to deleverage. The only irrational behavior is that of the politicians trying to stop the deleveraging. All policy that is intended to prevent deleveraging (i.e. increase borrrowing) at this time is based upon the theory that the problem ! with the credit bubble wasn't the existence of the bubble, but that the bubble ended. That is irrational. David Shemano _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
