Is Cheap Money Era Coming to an End?
MICHELE NORRIS, host:
From NPR News, it's ALL THINGS CONSIDERED. I'm Michele Norris.
ANDREA SEABROOK, host:
And I'm Andrea Seabrook.
Long-term interest rates have been inching up in recent weeks and that might be worth paying attention to, whether you're trying to buy a house or take over a company. For the last few years, a tide of cheap money has helped keep the economy afloat but now the tide may be turning. As NPR's Scott Horsley reports.
SCOTT HORSLEY: Maybe you're not the sort of person whose heart rate rises and falls with the yield on a 10-year treasury note. But even if you don't know it, interest rates matter to you. In recent years, cheap credit has boosted home prices, pumped up the stock market, and allowed even cash-trapped consumers to keep spending freely.
Mr. JAMES GRANT (Editor, Grant's Interest Rate Observer): Interest rates and the credit environment, you can think of them as traffic signals in a market economy.
HORSLEY: James Grant is the editor of Grant's Interest Rate Observer.
Mr. GRANT: We all like to hit a green light dashing through town. But if all the lights were green, we might never make our destination. And that state of affairs of all green lights has more or less characterized the past couple of years in credit.
HORSLEY: Wall Street has a term for this condition - liquidity. It's what enabled billionaire investor Sam Zell to sell his commercial real estate company to a private equity firm this year for a whopping $23 billion, then turn around two months later and offer $8 billion for a struggling newspaper company.
Zell told a San Diego real estate conference in January, there's more money looking for investments now than there are hard assets to invest in. He underscored the point by showing off one of the custom music boxes he sends to business associates each year, along with a financial commentary.
(Soundbite of song off a music box)
Unidentified Man:(Singing) Capital is always raining on my head. Everything is liquid, we're awash with cash to spend. Liquidity abounds. But revenue views(ph) keep falling as more capital keeps raining. What lies ahead?
HORSLEY: There are a number of explanations for this flood of cheap money. Central bankers have deliberately kept interest rates low until recently. And foreign savers have been eager to buy up U.S. government debt without demanding higher rates.
Economist Nigel Gault of the forecasting firm Global Insight says, in addition to these objective factors, liquidity also reflects a state of mind.
Mr. NIGEL GAULT (Chief U.S. Economist, Global Insight): Part of the liquidity story is not just what's happening to things like money supply or interest rates. Part of it is confidence. Confidence has been very strong.
HORSLEY: In some cases, maybe too strong. In the last couple of years, gobs of money washed into the sub-prime mortgage market, bankrolling home loans to risky borrowers who didn't have the income to repay them. Only after those borrowers began defaulting in large numbers did investors and lenders start to tighten up credit. Interest rate observer James Grant expects something similar to happen with the cheap money fueling corporate America.
Mr. GRANT: When a credit cycle turns, no branch of the debt markets is left untouched by it. People get fearful, they get risk averse, or they get sane, and they find their voices, learn to say no again, and an attitude of caution as opposed to reckless optimism. That attitude is pervasive throughout the credit markets. We're not there yet, by all means, but I think we're getting there.
HORSLEY: There's still plenty of cheap money available on Wall Street. But former Fed chairman Alan Greenspan warns it won't be around forever. Interest rates on 10-year government notes hit their highest level in five years last week.
Vipal Monga, who tracks Wall Street takeovers for The Deal magazine, says even though the traffic signals have begun to flash yellow, some investors are stepping on the gas, hoping to beat the red light they know is coming.
Mr. VIPAL MONGA (Senior Writer, The Deal Magazine): The real question that's hanging out there is what happens when the music stops, when default rates start going up, when the supply of debt coming to the market close down a little bit. That's what we're all waiting for. But I don't think it's something that any of us want to live through either.
HORSLEY: Sometimes there's a fine line between the confidence that fuels liquidity and foolhardiness. Bank of American chairman Ken Lewis said last month, we're close to a time when we'll look back and say, we did some stupid things.
Scott Horsley, NPR News.
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