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When credit markets are working normally, banks liberally loan each other money at very low, short-term interest rates. But with so much of their money tied up in mortgage-based assets of questionable value, banks have become hesitant to lend to each other. This is partly because they need their cash and partly because they're worried whether other banks, which are facing similar pressures, will be able to pay them back.

When banks do decide to lend, the borrowers, whether another bank or a consumer, are being slapped with a high premium. For example, the Federal Reserve's key interest rate for banks lending to each other is at 2% but banks have been charging other banks nearly 4% to borrow money. Those high rates trickle down to customers, both individuals and companies, on regular loans and credit cards.

NEXT: Corporations

Last updated September 30 2008: 4:33 PM ET
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