The sting of capital market segmentation

by on October 4, 2008 at 5:58 pm in Economics | Permalink

Greg Mankiw shows that real interest rates are rising on inflation-adjusted government bonds.  Paul Krugman shows that short-term Treasury yields are down.  The state of California cannot get short-term financing.  There is simply no one willing to lend.  Yet I would have no trouble buying a second home and getting another mortgage at a reasonable rate of interest and I am hardly a rich man.

Credit market segmentation is always there but it doesn’t usually matter this much.  The parts of the credit market that are paralyzed by fear are the major problem right now.  And until that problem is cleared up, we will witness a step-by-step disembowelment of the American economy. 

The clock is ticking.  We need very rapidly to get to the point where natural lenders are willing to lend and "cross-market arbitrage" is no longer a dirty word.

1 Andromeda October 4, 2008 at 6:19 pm

Yet I would have no trouble buying a second home and getting another mortgage at a reasonable rate of interest and I am hardly a rich man.

You say that, but have you tried lately? We’ve been threading the needle of a refinance that has been on the verge of falling apart for weeks. We have about the same income as when we got our current mortgage, with obviously longer employment and credit histories, we have no trouble with our existing mortgage, and we’d be paying substantially less; should be a slam-dunk, right? But our mortgage broker keeps running into hurdles, our lender spent last week not being able to decide who owns it or if it exists, and we had to drop me from the mortgage application to be able to get the refi at all (my credit is good — better than it was when we got the mortgage! — but not stellar, which makes it not good enough). It’s totally insane.

2 Robert Olson October 4, 2008 at 6:29 pm

“…and “cross-market arbitrage” is no longer a dirty word”

Woah there, chief! Isn’t promising unreal returns and beating the market and all that fun stuff part of how we got into this mess in the first place?

3 Sean October 4, 2008 at 6:38 pm

California has been on the verge of bankruptcy for years. I wouldn’t want to lend them money, either.

4 Isaac Crawford October 4, 2008 at 6:46 pm

I’m a little confused. I admit to not getting my head around this whole “credit crunch” so I’m asking for help. Is the problem that California can’t find anyone willing to loan that much money, or is California’s credit not good enough in the current market to get that much money? I would be surprised if a state that didn’t have as much, or any, debt couldn’t get a similar loan that California is now looking for. Part of me thinks that if you are relying on credit in order to maintain debt, failure is always an option. We would all like organizations to exercise fiscal responsibility, but is it unrealistic to think that the reason California is scrambling is because they don’t deserve a new line of credit?

Isaac Crawford

5 OneEyedMan October 4, 2008 at 6:53 pm

Has anyone any evidence that California cannot borrow the money it wants other than their say so?
I imagine that they just don’t want to pay the high rates they’d have to pay.

6 David Wright October 4, 2008 at 7:01 pm

The state of California is the poster child for “too big to fail”. I have a HELOC with a large amount of available credit at 5%/year. Anyone have a suggestion for how I could loan that money to California at 10%/year?

7 Craig October 4, 2008 at 8:24 pm


Let me second or third the calls here to explain why credit is frozen in some sectors; and, even more importantly, why this will spread, leading to your rather vivid metaphor. I’ve heard that lots of banks with healthy balance sheets are still lending.

8 dj superflat October 4, 2008 at 9:23 pm

second the confusion re refi: always a hassle, but i was paying the higher monthly nut, right, and now i’ve got more history at job, at income, etc. makes little sense, but happens every time. though, i guess, this time it makes sense since most loans over the past X years were jokes (in terms of review done on ability of borrower to pay).

as for callie, why loan to a disfunctional deadbeat, whether an individual or a state?

9 Luis Martinez October 4, 2008 at 11:39 pm

Maybe rates on long term bills should rise. The crisis we are having is one of government. The balance sheet of the average american is garbage, and the FED balance sheet is now heading in that direction.

Treasury with new powers seems to be focused on turning back the clock, to a simpler time when everyone paid everything on their credit card and everyone got a 5% mortage.

Americans are sick of debt, but unfortunately our Government is a junkie and now has decided to force some more debt down our throats. It’s a clear signal to the markets don’t expect any attempt to address National debt in the next 10 years.

The future is layaway.

10 Ian October 5, 2008 at 1:28 am

Tyler, it’s unlikely that rising yields for one type of government debt (Mankiw’s data) and falling yields for another type of government debt (Krugman’s data) are both evidence for the statement, “there is simply no one willing to lend.”

Besides anecdotes, I haven’t seen much evidence that “there is simply no one willing to lend.” I have seen some reasonably convincing evidence that lending is continuing mostly unabated.

11 MikeP October 5, 2008 at 5:00 am

Add me to the ranks of those who are looking to be convinced there is a lending problem, but have yet to see the evidence.

On California’s problems, we have this wonderful paragraph from my local paper

Locally, the cratering economy is already projected to cost Peninsula schools invested in a failed Wall Street titan millions of dollars, is holding up San Jose redevelopment bonds and threatens to increase city and county borrowing costs while lowering interest earnings.

Uh, okay. Money you borrow will require higher interest, but money you loan will earn less interest? I can buy that new credit friction might cause a little change in spread there, but a big change?

In perhaps the worst immediate fallout locally, the bankruptcy two weeks ago of Lehman Brothers, the fourth-largest U.S. investment bank, wiped out $155 million of a $2.7 billion San Mateo County investment pool, which serves local school districts and other agencies.

Hey! Instead of handing that money to high finance big shots who’ll kite it into risky mortgages, how about… I don’t know… putting it toward California bonds? What? Bad investment?

12 Matt October 5, 2008 at 8:54 am

If the US is undergoing restructuring, and we have just started, then investors do not yet know where to put their money.

13 Anne V October 22, 2008 at 11:41 pm

Real rates are being posted in the REAL lending being done privately – by hedge funds and mezz funds today – at 15% or more. And of course, Credit card companies, that were able to get around usury laws because of “inflation” (how long have we NOT had that – but we still have these rates) can charge the poorest people 30% and not be called crooks. It used to be illegal.

Everyone wants to be in CASH – the safest investment is treasuries – so that demand keeps rates down – to almost zero.

But in the so called “risky market” – where we all do business today – there are real rates being charged for the deals that are actually done. Look at the fees. And the terms. All in the rates for senior loans are extreemly high. Just because of fear and NO LIQUIDITY. AAA credits cannot get money. Perhaps we need a new market to evolve with analysts we trust – just like when this country was founded. The trust of one person to another.

Perhaps we need a new MARKET>>>>>

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