Next Things First

Caught in a Trap by Rob Coppedge
October 4, 2008, 8:49 pm
Filed under: economy | Tags:

After watching a number of very smart money managers throw their hands up during meetings in New York last week – really opinionated confident guys not knowing what is going to happen next – I thought this article  from the NYT might be a valuable post. Mark Sunshine from First Capital writes:

Here’s why these events are distressing: When the Fed douses the monetary system with cash but banks hoard it, monetary policy no longer works and the economy starts to crash. This is called a “liquidity trap” and it occurs when interest rates are at or close to 0 percent and monetary policy is no longer effective. Newly minted money is injected into the banking system but trapped by financial institutions that are paralyzed by fear. When banks don’t recycle their money through normal lending activity, it doesn’t matter how much the Fed increases the money supply. Monetary policy just won’t work. Failing monetary policy usually means that we are going to have a recession, or worse.

Posted by RobC


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