Augustus

Central Banks Are Destroying Traditional Risk Spread Methodologies

The Fed and Paulson have really screwed up the credit market pricing. In the rush to provide credit for various good purposes, they have driven the uninsured borrowers out of the market - or made borrowing unaffordable for them. It was not too bad if they had stopped at the GSE bailouts and guarantees. When they have now made the facility available for commerical paper of selected issuers they have ruined the rates for the rest. Banks have to lend money to borrowers. They also should have to do their own credit evaluation and pricing. The Fed has now guaranteed the loans to some very large borrowers, screwing many of the smaller ones which may really be much more credit worthy. It is a version of the "good money driving out bad" principle at work.