The Fed Dumbs Down the Math for Bankers

Bankers trading in the derivatives market and not understanding the equations they were using had a lot to do with the recent economic downturn (Of course, Alan Greenspan money printing was the primary factor).

So given the bankers' inability to understand complex equations, what's the Fed to do? How about dumbing down the math?

I do not suggest that Fed chairman Bernanke has done this on purpose, but he sure has made the math very easy for bankers. Forget regression analysis, if you understand how to subtract, you can now be a banker in the current Fed environment of Fed money printing madness.

At the start of this year, the yield on the 10 year Treasury note was 2.46%. The yield on the 3 month T-Bill was 0.08%. Thus a spread for bankers who borrow short and lend long of 238 basis points. That's a lot of basis points, and only subtraction required to figure it out.

But wait, things get better. As of yesterday the 10 year note was trading to yield 3.19% and the 3 month T-Bill was yielding 0.16%. Thus, the spread has increased to 303 basis points, a 27% increase in the spread.

Got that? A 303 basis point spread, which means bankers in the crazy, borrow short-term, lend long term, banking system that the Fed is trying to prop up, can make gazillions of dollars right now.

In the middle of the real estate boom, say January 2005, the 10 year note yielded 4.23% but the 3 month T-bill yielded 2.32%, still a positive yield curve, i.e. short term rates lower than long term (a bullish sign) but the spread was only 190 basis points and banks were rolling in dough.

At the current spread, the banks will soon overcome their lending fears and start putting money out to capture the 303 basis point spread. That's why the economy will continue to turn around and the stock market (aside from small pull backs) will continue to soar. The math of it all is real simple.