...an astute, comprehensive, and unemotional hypothesis regarding the current situation - from a local commenter on an AP article in San Diego's Union-Tribune:
From Wikipedia:
"In monetary economics, a liquidity trap occurs when the economy is stagnant, the nominal interest rate is close or equal to zero, and the monetary authority is unable to stimulate the economy with traditional monetary policy tools. In this kind of situation, people do not expect high returns on physical or financial investments, so they keep assets in short-term cash bank accounts or hoards rather than making long-term investments. This makes the recession even more severe."
We're all probably going to hear a lot about "pushing on a string" as rates drop. Most of the Fed's liquidity injections are flowing straight into T-Bills because this is a solvency crisis not a liquidity crisis. The odds of people paying back these Alt-A, subprime, and even prime loans are so low because prices are high. If you owe $500,000 on a home worth $300,000 you're highly likely to walk away, regardless of your credit score.
The Fed will cut rates but banks will continue to refuse to make these toxic loans. Because they're toxic. Housing prices will absolutely drop by half in the absence of these loans and the resultant negative wealth effect will kick our 70% consumer spending based economy squarely in the nads.
The Fed knows this hence the rate cuts we're about to see. I don't think it'll make much of a difference but you never know, now could be a huge buying opportunity.
