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When Is A “B” Bad?

Jan 30, 2011 • Financial Markets, Government, International Trade and Finance, Money and Monetary Policy • 110 Views    No Comments

A state would not call a “B” a good grade. The grade is a credit rating that relates to a loan. Triple-A usually means not to worry. On the other hand, a “B” says you might not get paid back.

As you know, recently, credit ratings have been problematic because borrowers with high grades have defaulted on their loans. So, sort of like changing the rubric for a test, Moody’s is (slightly?) changing the way it judges states. As a result, New York and California are among the states that may get higher grades while Connecticut and Hawaii are two of those whose “grades” will decline.

To assess the economic health of different states firsthand, you might want to look at these interactive maps on tax revenue, unemployment, foreclosures, and stimulus oversight from Pew’s Center on the States. You also could go to Moody’s or Standard & Poor’s website to look up a state’s grades.

The Economic Lesson

If not all borrowers are attractive, then why loan them money? The answer is price. The interest rate is the price of money. When a loan appears more speculative, then its price–its interest rate–goes up.  How does it go up? In money markets, we can observe supply (lenders) and demand (borrowers) at work. For a more risky loan, the supply curve shifts to te left and crosses demand at a higher “price”–interest rate. So, a lender might accept the risk because he or she is getting a higher price.

 


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