The one-word advice to Dustin Hoffman in The Graduate was "plastics." My one-word advice to the Fed now is "spreads." Fortunately, I don't think Ben Bernanke needs this advice. He gets it.
The problem is not that risk-free (or nearly so) interest rates are too high; rather, they are ludicrously low as investors shun risk-taking of any kind. The Fed will soon drop the funds rate to 50 bps, but this will be strictly a feel-good gesture that won't accomplish anything. That's a good thing, too, since with funds at 50 bps and Treasury bills at zero, there's no more ammunition there.
The real problem today is that market interest rates that are built over the Treasury or Fed funds base -- the rates at which real borrowers borrow and real lenders lend -- now range from high to prohibitive. If we are to get credit flowing again, the spreads must come down -- a lot. When the Fed buys commercial paper, guarantees GSE debt, or backs asset-backed securities, it is trying to reduce the spreads on each of these instruments over Fed funds or Treasuries. It should keep doing that.
Read The Full Post Here
No comments:
Post a Comment