Friday, November 21, 2008

Paul Krugman and Brad Setser on the credit markets

Nobel-winning economist Paul Krugman wrote yesterday:

Don’t panic about the stock market. Panic about the credit markets instead. Interest rate on 3-month Treasuries at 0.02%; interest rate on high-yield (junk) bonds over 20%.

In a similar vein, Brad Setser, at his Council on Foreign Relations blog, wrote yesterday:

Treasury yields aren’t hard to calculate. But they are still my favorite indicators of the scale of the current crisis. The fact that so many are willing to lend so much to the US Treasury for so little is a clear indicator of a lack of confidence in other financial asset. Dr. Krugman is right. Market analysts are more or less saying the same thing: ““Where the credit markets are trading, it’s all but implying a 1929 scenario,” said Joe Balestrino, fixed income strategist at Federated Investors”

. . . .

Suffice to say that surge in Treasuries — and rise in credit spreads — isn’t a good sign. Investors (including central banks) aren’t willing to accept anything that just has an implicit government guarantee — let alone debt with real risk. Right now they want nothing less than the full faith and credit of the US government.

The facts seem to show that September 15th (when Lehman fell) was a major day initiating a further fall in the economy as a result. The past few weeks seem to indicate another worsening has occured. The signs are it's going to be a tough Christmas season.

After which, the new administration is going to face major challenges. But I think they are prepared and confident. I'll write more about why I think that in the coming weeks.

For now take care. Things won't stay the way they are now forever. What they will change to, that's the question. But that things will change is certain. Let that thought lead you toward an enjoyable weekend.

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