Letters
TEXT OF STORY
Kai Ryssdal: We’re going to do things a little differently in our Letters segment today, because on top of all the comments about what’s been on the show, we’ve been getting loads of questions too. Our Senior Business Correspondent Bob Moon is here in the studio with me. He’s going to be the answer man today. Hey, Bob.
Bob Moon: Hello, Kai.
Ryssdal: No pressure here, but here comes the first question. All right?
Moon: All right.
First question comes from Jordan Weinstein in Boston, Massachusetts. He wants to know when people say the credit indices are showing a credit crunch, what indices are they referring to? Is there is a specific index that we can turn to, to give this guy the answer?
Moon: Well, this is part of the trouble tracking the credit-crisis, Kai. There’s really no widely available index that provides a broad picture like the Dow, say, or the S&P 500. When you see the yield on Treasury notes going south, or even below zero, that basically means investors are willing to make close to nothing on their money just to keep it safe.
You can also watch the latest credit spreads, for example, the difference between the government’s interest rate and the rate that banks actually charge to loan money. The bank-to-bank rate is tracked by that indicator we’ve mentioned a lot lately called the LIBOR. But you can actually see the spread between Treasury bills and the LIBOR with something called the TED Spread. I’ll suggest a few of these indicators on our blog to help you go find them.
Ryssdal: All right. Excellent. Seeing as how this crisis was triggered, at least in part, by problems in the mortgage business, we’ve had a lot of questions — and when I say a lot, I mean a lot — about private mortgage insurance. Jeff Delk from Athens, Georgia, sent one of those questions. PMI, of course, is the insurance you have to carry, if you put down less than 20 percent on your house.
Moon: That’s right.
Ryssdal: Jeff wanted to know what’s happened to that insurance. Why isn’t it taking care of some of these losses in these mortgage-induced crisis?
Moon: Well, fact is, a lot of these mortgage insurance companies have been facing some really big losses. You may have heard of one of them: AIG.
Ryssdal: Yeah, yeah, I’ve heard of that.
Moon: Uh huh, yeah. What’s also true, though, is around 40 percent of homes sold in the first half of this decade didn’t need mortgage insurance . . .
Ryssdal: Wow.
Moon:. . . because the buyers got “piggyback” loans. They essentially used a second loan to borrow their whole down payment. That’s suddenly changed, by the way. Now, not only will you need a big down payment if you’re lucky enough to get a loan, you’re also once again likely to be required to buy mortgage insurance.
Ryssdal: Hmmm. All right, it’s only a three-minute segment, so here comes the last question from Carice Pingenot from Cambridge, Massachusetts. She wants to know about credit, which is, I guess, appropriate enough. When the Fed says it’s going to try to ease the lending crisis by making money available — like they did a couple of weeks ago with that $900 billion — what does that mean? How much is that $900 billion in relation to theoveralll credit market?
Moon: This is a question that’s absolutely key to understanding why everybody’s so terrified right now. Trouble is, short-term credit’s always changing, so let’s just say it’s huge, OK.
Ryssdal: All right.
Moon: The commercial paper market covers a lot of the borrowing that companies do. The Federal Reserve, before the crisis hit, figured there was roughly $2.2 trillion worth of commercial paper outstanding. What’s really scary, Kai, is that number has plunged to roughly $1.5 trillion now. Which means a lot of companies can’t find lenders.
Ryssdal: Still can’t get credit. Marketplace’s Bob Moon, our Senior Business Correspondent. As he said, there’s going to be some more answers from him on our staff blog. It’s on our home page. While you’re there, send us your thoughts about what you hear on the program or what questions we can answer for you next time we do Letters. It’s marketplace.org — the link to click on says “Contact.”
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