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Edited on Wed Jul-27-11 08:15 PM by Igel
I don't think you understand bond interest rates.
Each bond pays an amount that's set when it's sold. The seller continues to "see" that interest rate. Let's say X sells a bond for $100 that pays $5 annually. My father buys it. The interest rate that a later buyer "gets" is increased or decreased by the cost of the bond at purchase. Let's say my mother bought it some time later when the interest rates were at 10%. Then that $100 bond would sell for less, perhaps $50. My father took a capital loss. The bond would still pay $5 but she would have bought it for $50--she would "see" 10% on the bond; the issuer still sees that they're paying $5 per year on the $100 they sold the bond for. So let's assume I buy it years later and pay $200 for it. It's paying $5, I'm getting 2.5% interest on my $200. The issuer is still paying 5%.
If the bond's interest rate goes up, it usually means the value of all bonds currently held go down. If the banks hold $500 billion and T-bill interest rate soars, they take a capital loss. If they are using those T-bills as collateral, their collateral's worth less and they effectively have to pony up more assets.
Banks pay little interest on loans from the Fed. Probably a good thing, right now. It means they charge less interest. There are limits to what they can borrow (called "collateral"). Regs tightened on reserve requirements, the quality of the collateral and amount. T-bills reduce their status, they're not good collateral.
The biggest holder of federal debt is the Treasury and the Fed. They've bought up trillions of dollars in federal debt to keep the interest rates down. That's kept $100-200 billion a month federal debt from public auction. The downgrade threat is based more on future debt issuances than on any suggestion of default in the next few months. You can't go on issuing $1.5 trillion a year in debt until the debt load becomes too great and the very issuance of so much debt causes the validity of the US debt to be questioned. (Personally, I think the president has more call to invoke the 14th Amendment to suspend the budget to avoid the issuance of new debt than to raise taxes or borrow on his own. Then again, my benefits aren't immediately on the line.)
Most intriguing, I find, is the difference in views between GM and the banks. Both got government bail outs. Both have made great strides to repaying their debts. Both saved jobs. And, arguably, the bank bailout reduced the impact of the financial crisis and, therefore, of the recession.
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