Liquidity Trap

How the liquidity trap works.

Category:

Education

Tags:

• Liquidity
• trap
• Lehman
• Brothers
• Fred
• from
• the
• Fed
• Tempestuous
• Season
• Banks
• Whiteboard
• Paddy
• Hirsch
• Monetary
• Supply
• Consumption
• Savings
• Investments
• GDP

[Morganside]

nice

[Ooftyman]

@Krugmanistheking Third, just because a hypothesis and a result line up does not mean it is 'proven'. Rather, it fails to reject the null.

While I would agree with Krugman that macroeconomics often relies too much on model at expense of theory, his analysis is somewhat shortsighted, failing to even consider that loose monetary policy is responsible for the initial excess liquidity that turned into the recession.

Paying someone to splash water around in a pool does nothing but empty the pool..

[Ooftyman]

@Krugmanistheking First of all, you misunderstand what rational behavior is. It is not always being right, the ability of foresight, or omniscience. Second, as almost any academic economist (I'm a PhD candidate) will tell you, macroeconomic forecasting has been very inconsistently predictive.

Krugman's analysis is of business cycles is generally somewhat sophomoric. He makes broad statements that assume firms are necessarily isolated from monetary policy. See next.

[Ooftyman]

Oversimplifications often lead to very, very false statements. Keynes' old model rested on a whole host of assumptions including that spending stopped altogether, that demand is for money (money is demanded -- it is merely a unit of exchange) and it aggregated an entire economy into one. Central bank attempts to subvert 'liquidity traps' are the problem.

I hate when high schools and undergraduate programs keep perpetuating this...

[BarrySlisk]

@Krugmanistheking

Ahh so I should just read any paper...You do not know of any particular paper you can recommend? Probably you have not read them yourself then. Well, thanks, that's so helpful.

[BarrySlisk]

@Krugmanistheking

Well Krugman isn't here, and you entered the discussion on his behalf. But ok..

Do you have a link to any of those papers you talk about? My understanding was that Business Cycle theory was not actually his particular area of expertise.

I don't actually need to read papers to know that directing resources from real production to useless production is a bad thing.

[BarrySlisk]

@Krugmanistheking

Stealing effects the incentives in the economy, so you should not disregard it.

Now why don't you discuss the points I brought up? You say I have not proven my point. Well you have not convinced me that redirecting scarce resources from companies (production) or employees (demand) to meet artificial demand for holes in the ground causes real growth (in usable production goods).

[BarrySlisk]

@Krugmanistheking

Exactly, to a Keynesian it better to steal money from productive people who create real products and wealth and give the money to people digging holes or people who prepare for alien invasions. Digging holes create no wealth and hinders the corrective behavior of the healthy bit of the free market, who now have fewer resources. Result is that the crisis will be prolonged (the analogy is that it takes longer to pay of your credit card debt if you are being paid less or taxed).

[BarrySlisk]

@Krugmanistheking

Digging holes or preparing for for invasions which will not happen does not make us richer. It is a waste of resources. Your name does not suggest that I take you seriously.

[BarrySlisk]

@fausto412

Krugman wants to prepare for an Alien Invasion. This should save the economy. What an idiot. How can you listen to this man?

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