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US banks are reported today to be very hesitant in refinancing homes. When I was in school, the liquidity trap was explained to me to be a drain on savings, because the interest rate was less than the value of keeping money in your pocket, ready to spend as you please.

This also seems a sort of liquidity trap, though perhaps the terminology needs to change. Banks can also horde money, but the reason is not liquidity, but the promise of higher returns at a later date. With mortgage rates at under 5%, lowest since the 1950’s, there must be promise of higher returns in the near future.

The real question returns, why was the US bailout focused on the banking sector? It seems to have made the problem worse, with more money being withdrawn from spending, and consumers ever more hesitant to spend. They are now trying to redirect money towards job creation. A worthy policy, but why was that not the focus to begin with?


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