My Home About Me

Sigh. Paul Krugman has me as his online "truth squad," but all I get is the anonymous coward and economist manque (or is that monkey), "PGL" at Angry Bear. Now he calls me "stupid" because I was quoted saying that investors have enjoyed a "zero price of risk." He produces a chart of the credit spread of low-grade corporates versus Treasuries, and notes that the spread has never been to zero, so I must be wrong. Let me explain to "PGL," whoever or whatever he is, how these things work. Actually, let me enlist Pimco's Bill Gross, the manager of the largest bond fund in the world and an angry bear himself, to do the explaining:

...high yield spreads dropped to the point of Treasuries + 250 basis points or LIBOR + 200. Readers can sense the severity of the diet relative to risk by simply researching historical annual high yield default rates (5%), multiplying that by loss of principal in bankruptcy (60%), and coming up with an expected loss of 3% over the life of future loans. At LIBOR + 250 in other words, high yield lenders were giving away money! [emphasis in orginal]

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