The US is in a textbook liquidity trap, and yet you've never heard it on the news.

http://en.wikipedia.org/wiki/Liquidity_trap

"A liquidity trap is a situation in monetary economics in which a country's nominal interest rate has been lowered nearly or equal to zero to avoid a recession, but the liquidity in the market created by these low interest rates does not stimulate the economy. In these situations, borrowers prefer to keep assets in short-term cash bank accounts rather than making long-term investments. This makes a recession even more severe, and can contribute to deflation.<1>

In normal times, the monetary authority (usually a central bank or finance ministry) can stimulate the economy by lowering interest rate targets or increasing the monetary base. These actions are meant to increase borrowing and lending, consumption, and fixed investment. When the relevant interest rate is already at or near zero, lowering it to a level which would stimulate the economy may not be possible. The monetary authority can increase the overall quantity of money available to the economy, but traditional monetary policy tools do not inject new money directly into the economy. Rather, the new liquidity created must be injected into the real economy by way of financial intermediaries such as banks. In a liquidity trap, banks are unwilling to lend, so the central bank's newly-created liquidity is trapped behind unwilling lenders."

They know what's going on, but they won't say it directly.

Why would those two words be magically more awful than what they've been explaining over and over?

If the people knew that even conservative economists like Milton Friedman supported the idea of directly lending to businesses and people, the banks would have no argument and would not be getting all this money.

That's the subtext of everything Obama's been saying, but I think that the Administration is fearful of fanning panic if it's too blunt. That's why fiscal stimulus a la Keynes is so important right now. Here's a great primer by my co-blogger: http://dagblog.com/politics/macroeconomics-101-spending-versus-stimulus-or-how-i-learned-stop-worrying-and-love-recessi

Thats because our politicians cant seem to get it through their heads that they have to nationalize the large banks, even if it results in some already wealthy bank executives and investors losing money, in order to restart our seized up credit markets.

The bankers arent going to begin lending again, their jobs are barely hanging by a thread with the large investors after losing so much money, so seizing them will be the only way we can hope to unfreeze the credit markets.

was directly handing money out to the people and directly lending to businesses, instead of doing it through banks.

Well, people might decide to keep that model around, even after things cleared up. The bankers would be out of a job.

The Federal Reserve has emergency powers that allows them to loan directly to consumers in times of emergencies.

CNN/MSNBC/CNBC ... no, you won't hear it there. Of course, there you won't hear anything that's even remotely similar to actual journalism.

On the other hand, I read more than a dozen news stories today in various papers/new sites (mainstream ones at that) in which the phrase was at least mentioned. Some commented at length on it.

Aside from the standard problem with cable news (this problem being that cable news isn't news), one of the other problems is that those who are still clinging to the idea that government spending is necessary have an interest in denying a liquidity trap exists. They don't argue against it. They simply ignore it. And these are very often people who inform or even write conservative-leaning editorials and analysis.

By contrast, Krugman, the various economists and other experts with RGE Monitor, et al have been railing about the liquidity trap for some time.

People wouldn't be up to their eyeballs in debt, banks wouldn't be fearful that little of it would be paid back, and the whole business wouldn't be grinding to a halt if wages had kept pace with inflation.

Of course, that would mean the very top wouldn't have gotten so obscenely wealthy over the past 30+ years, but into each life some rain must fall.

It's also not so much that banks are unwilling to lend, people who are unsure they'll have a job next week, let alone for the next 5 years, are loath to borrow. That means the consumer economy is dropping to zero as people sit on what they have and buy nothing but subsistence items while saving anything extra for the seemingly inevitable job loss.

The rich couldn't wait to end the New Deal, a program that managed the economy and created the longest boom in history. This is the end game of doing just that.

what the OP suggests, direct stimulus bypassing the banks, is true also, so the question is why?
:kick: & R

What are the long term effects? One must hope for the best, but it's real scary.

http://www.brookings.edu/papers/2009/0219_fiscal_future_gale.aspx

What are the long term effects? One must hope for the best, but it's real scary.

http://www.brookings.edu/papers/2009/0219_fiscal_future_gale.aspx

http://en.wikipedia.org/wiki/Minsky_moment">Minsky Moment and have had several failed attempts to escape the trap using http://www.nber.org/~wbuiter/helijpe.pdf">Helicopter Money.

Ain't http://en.wikipedia.org/wiki/Zero_interest_rate_policy">ZIRP grand?

The IRA contribution limits are truly maddening. This is where some tax cuts should be implemented.

Why give cabbage to Sam so he can buy equities with it? Instead let the individual buy equities directly in his own IRA retirement account. I am sure some kind of benificial tax incentive could be crafted.

There is a little known secondary market for Treasuries known as the Repo Market. It is huge, about $15 trillion. The Fed's policy of interest rate drops caused it to fail in September, which led to systematic lockup of a number of financial markets, including normally very liquid money markets. This was the effect of the liquidity trap we find ourselves in because of negative real interest rates.

The Fed provides stimulus to the 20 or so largest global banks that are collectively known as the Primary Dealers in the Repurchase (Repo) Market for T-bills. In September interest rates dropped so low that banks refused to trade T-bills, resulting in a "failed" Repo market. Normally, short-term trading is required so that funds managers can acquire the T-bills with the right maturity date to balance out risks in their portfolios. When repo trading failed, these institutions stopped trading in other markets, as portfolio risks could not be managed through the normal mechanism of acquiring "zero-risk" T-bills.