>Barney writes:
>>... the question is, does anyone still hoard? There are plenty
>>of virtually risk free, short term financial instruments. The municipal
>>bond market seems pretty damn liquid these days. And for those of us of
>>more modest means, there are interest bearing checking
>>accounts. ....
>>More to the point, does the concept of liquidity preference still make
>any
>>sense. Consumers certainly don't have to worry about liquidity - we
>have
>>credit cards.
>
Consumers aren't the problem, though, since most are net
debtors and not in the business of financing business
investment. The advent of deposit insurance certainly has
changed the nature of hoarding for small savers. But big
savers never put their money under the mattress, even
in Keynes' day.
The issue with "hoarding" is that, if big financiers --
institutional investors and very wealthy individuals, net
creditors who supply most of the financing for new
investment -- are bearish on bonds, prices will fall and
yields rise. The "liquidity" you perceive in the municipal
bond market is illusory. To be sure, there is a broad
market and it's usually easy to find a buyer, but there's
no gaurantee that you can sell at the price you paid.
The idea of liquidity preference, in it's more modern
post-keynesian version, is that financiers will, if they
become bearish on bonds and stocks (due to rising
interest rates or the expectation of rising interest
rates, or due to a market crash), refuse to lend long-term.
They may be willing to hold bills and commercial paper,
but business borrowers can't undertake major long-term
investments if they have to refinance every 6 months,
so the unwillingness of financiers to lend long dampens
lending.
Keynes called this situation a liquidity trap and felt this
was a good argument for fiscal policy and government
investment programs. Unlike private firms, the federal
government can finance long-term projects with short-term
debt.
Ellen
