This is especially bad news for banks because a major source of profits for money-center banks is the ability to borrow money at short-term rates and lend at long-term rates.
On the consumer banking side, a more normal yield curve would benefit banks like Morgan Stanley due to a better lending environment as banks can borrow short-term rates and lend long-term.
They can borrow and lend using the gold-linked currency of denomination, or simply use it as a basis for pricing goods and services.
The LTRO can be seen, and is seen by bankers, as a hidden injection of capital into the banks by eurozone taxpayers - because the banks borrow the three-year money at 1% and can re-lend it for considerably more.
In effect, the authorities are having another go at persuading banks to lend - and companies and households to borrow.
Former Bush economic adviser Larry Lindsey recently came up with a good idea in the Wall Street Journal to unclog the tightening credit arteries: Allow manufacturers and retailers to open up their own in-house banks or financial institutions that could borrow and lend money.
After all, isn't that what the Libor rate is supposed to reflect - the rate at which banks are able to borrow and lend from each other?
In 1941, the U.S. Congress passed the Lend-Lease Bill, which enabled Britain to borrow money to buy additional food and arms during World War II.
And until we can return to housing-market stability, banks can borrow for next to nothing and lend at rates once charged only by Mafia loan sharks.
It drives short-term interest rates lower allowing banks to borrow low on the short-term end of the yield curve, and lend high on the long end.
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As Japan has discovered, lower interest rates can do little to boost domestic demand if banks, saddled with bad loans, remain reluctant to lend, while debt-laden firms remain reluctant to borrow.
As the banks have been reluctant to lend ever since the 1994-95 crisis, farmers cannot borrow to buy new equipment and seeds.
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Yet, somehow, he and his fellow policy-makers at the Bank must convince the country, and the City, that more quantitative easing will meaningfully offset this gloom, and that further steps - like easing the liquidity requirements for banks, and the "funding for lending" scheme - will finally encourage banks to lend, and firms and households to borrow and spend.
GE's gold-plated credit rating lets Neal borrow money at 3% to 5% interest and lend it out at rates of 10% to 12%, on average.
You'd need something like turning the EFSF into a bank, which could borrow from the ECB to lend to governments (I wrote about this idea in September - see Central banks and the 'spirit of 2008' ).
But the fundamental problem remains - that the companies to which the banks want to lend do not want to borrow.
Banks have been riding a steep yield curve, meaning they borrow money at virtually no cost from the government and lend it out or invest it in higher-earning assets, profiting from the difference.
We are experiencing something very similar to what happened in 2007-8, when it became increasingly hard for banks in the developed west to borrow and to lend, and that credit crunch transmuted into banking crisis, which transmuted into the worst recession since the 1930s.
But the obvious way to find the money is to manage their cash-flow better, to encourage existing investors to lend more by treating them properly, or to borrow from commercial banks.
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