banks no longer want to lend money to corporations

Something is happening in the credit markets...



The above is the price of corporate loans in the secondary market - i.e. on the market where banks trade IOUs from corporations. If you have a contract that says that a company owes you 100, you can usually sell it (to other banks or financial investors) for 100 or thereabout - a bit more if the buyer thinks the interest rate on the loan is really good, or a bit less if it thinks the interest rate is not quite enough to cover the risk that the company might go bankrupt before paying its debt back.

As you can see above, the price of an IOU of 100 dropped brutally this month from 100 to 95 in the US (and to 97 in Europe). This is the lowest level ever for that market, and an unprecedented drop.

This is a credit crunch.

-cut-

What this means is that the inertia of big financial masses is such that the asset price inflation continues to seep through into actual goods inflation, thus preventing a lowering of the rates. The need for the USA to fund its current account deficit by foreign investors also militates against any rate cuts (as they would cause a drop in purchases of US Treasuries, and a further weakening of the dollar) Finally, of course, the need to not cause any further panic (we're close enough to that, as suggested above) also pushes against any decisions which would be seen as an acknowledgement of the gravity of the situation. Better to do as if all were fine, for now.