The Privilege to Lend

            *A History of Interest Rates *is a book written by Sidney

Homer, best known for his pioneering and analytical work on the economic forces that drive bond market trends, and our own Richard Sylla, an esteemed economic historian at New York University’s Stern School of Business. The book is largely a dull affair filled with charts and tables of, you guessed it, historical interest rates. There are a couple of interesting tidbits, such as the fact that in the Code of Hammurabi, a man can hypothecate his wife against a loan, as well as the notion that Islamic banking systems have mispriced the time value of money on account of their consideration of usury as a sin.

            It is intuitive that lenders should be compensated for the

willingness to lend out money, and that borrowers ought to pay rent on the money borrowed. The credit freeze that resulted from the financial collapse of 2008 incited central bankers to lower short-term interest rates to near zero in order to facilitate the thawing of the credit market. Some countries had bond yields that were below inflation which results in a negative real return for bondholders, as seen in the Swiss debt market. With the European Central Bank desperately trying to stave off deflation with quantitative easing measures, yields have shrunk such that short term debt is returning a negative nominal rate (before inflation is taken into account). The yield on the German two year note is -5 basis points, and Irish two year liabilities are also yielding a negative return. Risk-averse investors seeking low volatility instruments such as Euro-denominated money market funds can anticipate their ultraconservative investments to yield less than 3 basis points. With the burdensome flood of a trillion euros entering the financial system, money market investors may effectively have to pay to lend.

-Nicholas Kodati