HES: DISC--Liquidity trap?

[Pat Gunning]

Rod Hay wrote:
>
> The Keynesians introduced the multiplier (the idea that the increase 
> in aggregate demand would be larger than the increase in public 
> spending), and the idea of the liquidity trap. 


This idea never made any sense to me, although it is certainly a catchy 
phrase. Why wouldn't a lender who expected the interest rate on a longer 
term loan to rise be willing to lend for a shorter term? And if lenders 
are willing to lend for a shorter term, why wouldn't intermediaries 
combine expected shorter term loans into a long term loan, while 
providing guaranty for the shorter term loans? Doesn't anticipated gain 
drive the decision to save? Isn't the ability to earn interest on 
short-terms loans to a Keynesian bond market speculator a way to have 
her cake and eat it too?

The liquidity trap seem to me to be just another one of Keynes's 
misunderstandings about how markets work. If so, it was hardly a 
contribution. Can someone explain why it is regarded as a contribution?

Pat Gunning