This optimistic attitude has become especially evident in quality spreads on high-yield corporate bonds -- what we used to call “junk bonds.” In addition, banks have continued to ease terms and standards on business loans, and margins on many of these loans are now quite thin. Many banks are pulling back a little from consumer credit card lending as losses exceed expectations.
Nonetheless, some bank and nonbank lenders have been expanding aggressively into the home equity loan market and so-called “subprime” auto lending, although recent problems in the latter may already be introducing a sense of caution. Why should the central bank be concerned about the possibility that financial markets may be overestimating returns or mispricing risk?