Dollars and Jens
Thursday, May 21, 2009
Three month LIBOR today is 0.66125, bringing the TED spread to about 50bp. So the credit markets have healed? Well, I read a suggestion a couple days ago that maybe this is just more evidence of a liquidity trap.
As a pure credit risk premium, it makes more sense to hold currency at 0% than to make a loan with a 1% annual default rate at 66bp. A 0 bound on interest rates becomes a 100bp bound on a 100bp credit risk. It seems possible to me that some more exotic kind of risk would allow these rates to keep coming down in response to elastic liquidity demand, but I'm inclined to view this as a normalized market. I firmly believe that this recession, if perhaps a bit severe yet, is qualitatively pedestrian at this point. Let monetary policy work, and keep most of the fiscal policy oriented toward not destroying the institutions responsible for the growth of the American economy.