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Friday, January 16, 2009

TARP fund math

Banking is a business of spreads. A bank borrows money from depositors at one rate and loans money to creditors at a higher rate. They collect the spread. The Treasury loans money at 8%. The Fed has set interest rates at near zero. How can a bank loan money to anyone but the most risky of creditors with that kind of spread? They can't really. They have to invest in risky assets. There is a disincentive to lend implicit in these TARP loans.

Moral hazard is in high gear, my friends.

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