[lbo-talk] interest rate policy

[Marv Gandall]

There's a profitable carry trade currently underway for the European banks while European workers are getting squeezed. Thanks to the ECB's Long Term Refinancing Operation introduced in December, the banks can borrow cheaply at 1% over three years, putting up the most dodgy collateral, while investing in Spanish and Italian bonds yielding about three to 300-400 basis points higher over the same period. The banks reportedly increased their holdings of the sovereign debt of the two countries by a record amount last month. The ECB loan facility to the banks so far amounts to about a trillion euros.

On 2012-02-28, at 8:48 AM, Tony Rolfe wrote:


> Borrow at 0%, buy T-bonds at 2% (or higher, if inflation picks up).
> 
> That's not really speculation is it?  Somehow I thought these guys
> borrow at 0% and then trade pork bellies.
> 
> On 2/28/12, Doug Henwood <dhenwood at panix.com> wrote:
>> 
>> On Feb 25, 2012, at 11:29 PM, nathan tankus wrote:
>> 
>>> Second, I would dispute that setting the federal funds
>>> (internationally, and more accurately, referred to as the interbank
>>> lending rate) at zero is an "easy money" policy. I think the
>>> relationship between interest rates and the rate of money creation is
>>> weak at best.
>> 
>> It's manna to speculators (see: the Greenspan years). Borrow at 0%, buy
>> T-bonds at 2% (or higher, if inflation picks up). You'd have to regulate all
>> kinds of other things to compensate.
>> 
>> Doug
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