The Financial Crisis continues apace

Brad Setser takes on the Foreign Bond Vigilantes story. He finds that Foreign Central Banks are not abandoning the treasury market, rather they are moving from longer dated (more than 2 yr) treasuries to shorter dated ones. This has an effect exactly the opposite of Greenspan's paradox, it lowers the cost of borrowing short and raises the cost of borrowing long. The effect is to drive up the costs of borrowing to fund the governments ongoing operations and to strangle the refinance boom (which is both getting Americans out of toxic mortgages and generating fee income for sick banks).