Gerry Canavan

the smartest kid on earth

‘Riskless Return’

with 4 comments

Ezra Klein on my broken record: If the federal government’s borrowing costs rise, so will everyone else’s. Mortgages rates will jump, car loans will be harder to come by, universities won’t be able to float bonds, cities won’t be able to fund themselves.

Treasuries are supposed to set the rate of “riskless return” — the price of loaning someone money and knowing, with perfect certainty, that they’ll pay you back, with interest. So when lenders decide how much to charge, they start with the riskless rate and then add to it to cover the risk that you won’t pay them back, and the inconvenience of having to wait for you to pay them back.

It’s a practice called benchmarking, and it’s everywhere: in your mortgage, your credit card, your car payments, the loan you took out to hire three new employees at your business. It’s even common internationally. The fact that Brazilian loans tie themselves to the American government’s debt just shows the high esteem in which the world holds us.

But if the rate on 10-year Treasuries rises, it means rates rise for everything else, too. That’s why economists consider the Federal Reserve’s power to affect interest rates — a power it has virtually exhausted during this crisis — so potent: if you can move the basic interest rate, you can move the whole economy.

4 Responses

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  1. It would be nice if the Republicans understood basic economics, instead of just pretending that default risk doesn’t exist.


    July 16, 2011 at 2:00 pm

  2. The answer to this type of depression, is usually a new WAR to stimulate the economy, but I think they have been trying to do this for a few years now, starting all these small wars for some strange reason each time, and it does not seem to be working. Why ?

    Mary Dicerni

    July 16, 2011 at 11:19 pm

  3. […] eliminating the debt ceiling completely is now the only way left to calm the markets and prevent a potentially catastrophic downgrade: Asian stock markets fell Thursday as uncertainty over the U.S. debt […]

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