Corporate bonds, LIBOR and the Fed target rate

Speaking of Paul Krugman (he’s discussing financial crises at Google, here):

Ben Bernanke has cut interest rates a lot since last summer. But can he make a difference? Or is he just, as the old line has it, pushing on a string?

Here’s the Fed funds target rate (red line) — which is what the Fed actually controls — versus the interest rate on Baa corporate bonds (blue line), which is probably a better guide to what matters for actual business spending.

It’s pretty grim. Basically, deteriorating credit conditions have offset everything the Fed has done. Doubleplus ungood.

This is an aspect of modern monetary policy. As we’ve seen since the Summer in practice, Central banks actually control less and less of what counts as Money Supply (since Money moved from Fiat proper to debt-backed) – meaning markets can run away from stabilising control a little quickly – not that utterly absent regulation over didn’t contribute mightily.

Krugman also discusses the LIBOR – the London Inter-Bank Offering Rate. It’s what banks charge to lend to one another, and we compare it so what banks charge to lend to the govenrment. Funnily enough, after having run so high through 2007, it’s now below the Fed target reate:

graph

Perhaps we will see yet more rate cuts, then (since, by rights, it ought to be higher – I think. What do I know about finance, anyway?).

Could it also make interest-only loans more (meaning, of course, too) attractive to distressed mortgagees? Man, I hope not. Krugman estimates, up in that video, that the US consists of around 40% of households with negative equity in their homes.

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