Liquidity Trap?

Are we facing liquidity traps ? US keeps injects money by lowering the target rate but banks are not willing to lend. Is it Paulson discovered the problem and call off the TARP ?

How about fiscal policy ?

It has been suggested that the Japanese economy in the 1990s suffered from a "liquidity trap" scenario.This diagnosis prompted increased government spending and large budget deficits as a remedy. The failure of these measures to help the economy recover, combined with an explosion in the Japanese public debt suggest that such a fiscal policy, may not have been adequate. (Much of the government spending followed a stop/go pattern and involved spending on unneeded infrastructure.)

Paul Krugman suggests that what was needed was a central bank commitment to steady positive monetary growth, which would encourage inflationary expectations and lower expected real interest rates, which would stimulate spending.

How ? change from implicit monetary policy to target inflationary policy and keep interest rate for a extensive period ? or huge fiscal stimulus ? Let 's wait and see.

http://krugman.blogs.nytimes.com/2008/11/15/macro-policy-in-a-liquidity-trap-wonkish/
http://web.mit.edu/krugman/www/jpage.html