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Is this what a liquidity trap looks like?

A liquidity trap gives one the feeling that the monetary authorities are pushing on a string. The amount of liquidity the Federal Reserve and other central banks around the world have provided for the financial markets has been huge. The Paulson Plan was supposed to create confidence that illiquid assets would now have some liquidity. The Fed Plan to purchase commercial paper was supposed to create confidence that illiquid assets would now have some liquidity.

Yet, the financial markets remain silent.

Seemingly, no one wants to commit because no one is sure about the solvency of other participants in the financial markets.

Bernanke spooked the financial markets again yesterday as he talked about a possible cut in interest targets …which he did follow through on this morning.

The message the market heard, however, was how dire things were. And, the market asked, What does Bernanke know that we don’t?

The absence of leadership seems to reach new heights daily. (See Mase: Economics and Finance for October 7, 2008.)

But now we are apparently in a liquidity trap. Consumers are pulling back their spending…the latest figures out on consumer credit even show a decline. Businesses are consolidating and cutting spending and hiring plans. State and local governments are going to the Federal Government to get cash to help them meet payrolls. And, then the Federal Government…

Get out your old copy of Keynes’ General Theory.

Source: Caught in a Liquidity Trap