Tuesday, December 9, 2008
Treasury Bills Trade at Negative Rates as Haven Demand Surges
Fed expanding bank reserves and that is what has pushed rates to zero (negative). Fed believes that low rates will spur credit demand, however, lending is pro-cyclical, meaning that credit demand is normally low in a weak economy. There is much history to suggest that this strategy may not work, particularly in the current environment.
In addition, many financial intermediaries are no longer in business or not functioning as before, so the transmission mechanism to the economy is impaired. Finally, a lot of banks are still struggling with capital issues and that is also constraining their ability to lend.