I don't quite understand Trond's reasoning re. the money
market. If I read him right, he's saying that widespread
insolvencies somehow tell the possessors of liquidity that
the rate they are charging for lending the stuff is
unreasonably high -- i.e., that insolvencies lead to a
reuction in the rate of interest via their effect on the
supply side in the money market.
To me, this seems perverse. If (potential) lenders see
insolvencies, won't that make lending seem all the
riskier? And won't that tend to raise rates further, via
an increased "risk premium"? I'd have thought that if
a spate of insolvencies is associated with a reduction
in the rate of interest, this association would have to
come about via a reuction in the demand for loanable
funds (i.e., potential borrowers are forced to think
twice) rather than via an increase in supply. On the
supply side, lenders should be willing to lend at
lower rates, the _safer_ that lending appears to be.
==========================
Allin Cottrell
Department of Economics
Wake Forest University
[EMAIL PROTECTED]
(910) 759-5762
==========================
