Economy Better, but Not Yet Out of Woods

In mid-April, Libor surged by 0.08 percentage points in one day after BBA, amid heavy scrutiny, announced it was speeding up a probe into the accuracy of its information from banks. More recently, a London-based broker-dealer with offices in New York called ICAP announced plans to launch a new, U.S.-focused measure of interbank lending rates. Citigroup interest-rate strategist Scott Peng has proposed the creation of a "NYbor" index, which would track the borrowing costs of U.S. banks only because problems for European banks are viewed as having an outsized effect on borrowing costs in the U.S.

At any rate, markets are having trouble swallowing the Fed's easy-money policies -- little wonder, considering that record-low interest rates earlier this decade orchestrated by Bernanke's predecessor, Alan Greenspan, are widely blamed as a root cause of the housing bubble to begin with.

"When the history of this period is written, it will turn out that we had negative interest rates -- a fed funds rate below the rate of inflation -- for the majority of this decade," says Alpert. "The only time the Fed tried to put rates back where they should be in 2004 and 2005, it blew up in their faces. There's something very wrong when you have a situation where the U.S. economy will crater unless interest rates are brought artificially low."

One way or another, the low-rate environment can't last forever.

"Rates will have to go higher, because people who have money and who are interested in investing are realizing they made loans at way too low an interest rate in terms of the risk they were taking," says Anthony Downes, a senior fellow with the Brookings Institute. "They're going to demand higher interest rates."