Thursday, September 18, 2008

Negative Nominal Rates

I mention a while back that T-Bills rates could easily go negative and they have. We are now experiencing exactly the type of scenario that could produce fairly deep negative rates, perhaps 0.5% or more if things get bad.

Right now, there is what seems to be a run on money market accounts. These accounts function as checking accounts for large investors, a place to hold cash you need ready access to. Unfortunately, some of that cash was invested in very short term bonds from Lehman Brothers. Fear, that these short term loans will not be repaid on time or that other companies might be late on payments people are taking their money out of money market accounts.

It has to go somewhere and since you can't hold cash, you hold T-Bills. I agree with Krugman that it is both intellectually fascinating and personally frightening to see negative these rates can get.

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I would love to see your take on this week's events...is this a good idea? Who would you put in charge of managing this process?

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