Thursday, December 13, 2007

Fed bailout doubts

Why the Fed bailout might not work

The Federal Reserve's latest move to make credit markets more liquid could deepen problems in the banking system and actually cause the markets to be even more illiquid.

Posted by happyrenterz @ 12:48 PM (698 views)
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One thought on “Fed bailout doubts

  • Also,
    If there are expectations of rampant inflation (for example, 10 to 20% p.a.), this will also decrease lending. Lenders will want to charge high rates (they’ll probably take the more pessimistic view of inflation (20%)), but borrowers won’t want to pay as much (they’ll want to err on the side of caution also and estimate just 10% inflation). This widening gap will decrease the volume of transactions.

    It’s only when inflation is really low that borrowers and lenders agree with each other on inflation expectations and hence can agree on fair rates.

    The above has the advantage of being a less psychologically-based explanation. It also reminds central banks to just concentrate on inflation.

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