Now the media has reported any number of times that the money market has seized-up. OK, what does that mean, and how do we know it. Well, just now, I can't recall any kind of index that would indicate that money market lending has stopped. I was going to write that people offer the "TED Spread" as evidence of the crisis, but that index is the difference between inter-bank lending interest rates and some sort of government bond rate. But the TED Spread is measuring a different thing than the money market. So, what kind of evidence do we have of a credit seizure?
I think evidence would be several things. First would be a chart of interest rates over time. Second would be a chart of the amount or volume of funds borrowed or lended. Third would be an analysis that would should a nominal sensitivity of the volume of funds borrowed versus interest rates. I would expect that this demand chart would show that fewer funds are borrowed when interests rates are higher. Finally, I would look for a plot of the current volume/interest rate point on that same chart, and would expect that point to fall well below the nominal line. That is, for even high rates of interest, the current condition is well below what you would nominally expect. I've not seen any analysis like this.
What does exist is a great deal of anecdotal evidence on the current rates of interest, particular relative to government bonds. People are claiming that interests rates are three or more percent higher that what was being paid last month, or earlier in the year. I can certainly believe that interests for these types of loans are higher than in the recent past. I also expect that the amount of boring at those rates are lower than they would be at lower rates. But it is difficult to believe that there is no borrowing going on at all. At higher rates, companies should begin the hard work of analyzing the return on such borrowings, and making the decision to borrow or defer the investment. I would expect this even of short term borrowing, with the understanding that I am willing to pay a greater amount to borrow for short term needs like payroll and inventory, as without those I would be shortly out of business. Now the increased interest is a direct hit to my profit, but a cost I must endure for the ongoing concern.
There is a flip side to this borrowing equation, and that is the lending side. If my business is to lend money for an interest rate, then the longer I go without lending money, the more interest I lose. So there are a number of companies out there who are losing money by not lending to creditworthy borrowers. This is even more difficult, when the rates that I'm able to lend at are significantly higher than this month than they were two months ago.
Personally, I would like to be able to deposit money in a bank these days, and earn a higher rate of return on my deposit than I could get for purchasing Treasury bills or bonds, as the interest on Treasury instruments is rather low.
The effect of the various bailouts on this process, though, is perverse. By interving in the market at rates lower than what the market currently indicates, it preserves the profit margin of the companies that are borrowing, and denies the opportunity for lenders and savers to capture some of those profits.
The bailouts will tend to preserve the status quo, which is what got us into this difficulty in the first place. This is all done to perserve ten or so percentage points of growth in the GDP over time, under the belief that to do nothing would scrub many more points off the measure. The cost of these bailouts will be an inevitable increase in inflation and the debt durden on future generations. As other writers have pointed out, there is an opportunity cost as well, in the failed investment in infrasture that might matter a few years down the road.
So I have the feeling that I've been held up, because of the tremendous sums that are being spent to preserve the profit margins of the very organizations that got us into this mess in the first place. I wonder what my next step should be.
