Consumer Credit Chart Speaks for Itself

Consumer Credit Chart Speaks for Itself

October 7, 2008 0 Comments

This is what happens to consumer credit when the capital market freezes up and there is no money available at any rate. It is the reason posted rates are so misleading as a measure of the cost of capital today. The appropriate way to measure cost of capital during a blackout is to ask borrowers how much they would be willing to pay if they could get the money. This is known as the shadow price. At times like these it is 20%, or 30% or even higher. This illustrates the folly of thinking about monetary policy in terms of the fed funds rate during nonequilibrium events. That thinking is what got us into this crisis. 

JR

 

John Rutledge

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