LAST MARCH, when interest rates went soaring to unprecented levels, the financial markets nearly strangled. Long-term bonds, traditionally the last word in financial security, became almost unsalable. Companies that depend on the bond markets for financing suddenly found the doors shut and the costs prohibitive. Then in April, with a sharp recession under way, the rates dropped spectacularly and things began, in a gingerly way, to return approximately to normal. There appeared to be permanent damage to the makets, most of the experts said -- but, they agreed, that kind of thing couldn't be permitted to happen again.
It's happening. Rates are now very close to the March and April peaks. The markets won't collapse. The high rates are rapidly losing their ability to shock and scare. People seem to adjust very quickly to interest levels that, even several years ago, would have seemed a prescription for instant disaster. But the banks and businesses that trade in money and debt are rapidly adapting their practices to this perilous environment, and those adaptations have more than narrow technical significance. The economy runs on borrowed money, and the ways in which debt is packaged and traded affect the whole economy's operation.
Long-term bonds, to take one example, are losing their appeal to those investors who want safety. Traders say that bonds are apparently being bought bow mainly for speculation. Bonds are very long-term loans, dand many kinds of economic growth depend on them. If they become riskier and more expensive, growth will become slower and more difficult.
One response is a loan with a variable interest rate that's reset perhaps every six months. If the present interest yo-yo continues, variables rate mortgages will quickly become standard in this country -- as they did long ago in Britain. That kind of mortage is keyed, usually, to the prime rate. When the prime shoots up, as it is now doing, your monthly installment goes up -- or, alternatively, the number of mortgage payments spins out farther into the future. Similar things are happening in corporate finance, as companies increasingly borrow for the long haul at variable rates.
For the industries most dependent on long-term debt -- above all, the public utilities -- that's going to make profound changes in the accustomed ways of doing business. As borrowing becomes riskier and the costs of repayment less predictble, companies will have to be more cautious in expanding. Where that encourages genuine conservation of energy, it's good. But it will not be so good where it means only higher costs and narrower margins against shortage.
What's the remedy for these radically unstable interest rates? There is none. The swings and swoops in interest are only the result of the basic trouble, not the cause. Interest reats are high and fluctuating because the inflation, which drives them, is high and fluctuating. And the inflation in not improving.