Monday, February 25, 2008

Today's Word: "Solvency Risk"

From Bloomberg:

``The Fed's policy tools may not be very well suited to deal with this particular situation,'' Robert McTeer, former Dallas Fed president and a fellow at the National Center for Policy Analysis in Dallas, said in a Bloomberg Television interview Feb. 20. ``The Fed can give liquidity to the markets, but the Fed cannot do much if the markets are afraid of solvency risks.''

McTeer has said in a far more succinct way what I have been trying to say for the last 6 months. The main issue facing the financial markets is solvency risk. Lenders are worried that borrowers of all stripes won't be able to repay their loans -- even incredibly short-term loans. that's what's spooking people big time.