Dan M wrote: > "Oh, the irrationality." Why would people be reluctant to by one day notes > from GE. Does any sane person think GE will go belly up _tomorrow?_ That's > what the interest rate measures...the willingness of folks to buy GE notes. > All of a sudden, buyers dried up. That's a measure of the panic. A rational > market wouldn't change GE's interest rate that quickly because companies > with idiots as managers (e.g. AIG) went belly up and had to sell most of > their equity to the government at a discount or go bankrupt. > I'm going to have to disagree with you here, to some degree. Your premise is not as true as you might like. The interest rate may have a long-run *tendency* to approximate the credit-worthiness of a borrower, but in the short-run it is simply the price that clears the market for loanable funds. If there is a sudden sharp reduction in supply, as happened here, it will result in a sharp increase in the interest rate.
Now, you might say that the sharp reduction in supply is irrational, but I don't think that is the case. As you initially postulated, the interest rate for any particular loan is a function of the risk of that loan, and we have had a revelation in recent days that evaluation and pricing of risk was seriously wrong throughout much of Wall St. Regards, -- Kevin B. O'Brien TANSTAAFL [EMAIL PROTECTED] Linux User #333216 "The theory of quantum electrodynamics describes nature as absurd from the point of view of common sense. And it agrees fully with experiment. So I hope you can accept nature as she is--absurd." --Richard Feynman _______________________________________________ http://www.mccmedia.com/mailman/listinfo/brin-l
