Monday, September 12, 2011

On the Economy

Vincent Reinhart: The influential former Fed economist sees a growing risk of a double-dip recession in the U.S.

"By lowering or eliminating the rate on excess reserves, banks would at least be forced to invest in government debt or corporate commercial paper even if they refuse to make more loans," says Alan Blinder, the Princeton economist who was a vice chairman of the central bank during the Clinton administration. "This is by no means a major weapon in reviving the economy, but the move would be marginally helpful."

The record also shows that recessions tend to occur whenever the high yield bond spread’s month-long average tops 700 bp. The only exception to this tendency was the second half of 2002, or when a recession failed to materialize notwithstanding the high yield bond spread’s 784 bp average of that span.

That’s the worry in the market as of Friday. If you look at CDS spreads from last week we see enormous moves across the board. And while Greece appears to be on the chopping block for some sort of haircut, it’s actually the other periphery nations that are becoming a concern. The markets appear to be telling us that if Greece goes then Portugal is next. And you can imagine where we go from there. Ireland, Italy and Spain are quickly moving up the list….

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