Don't watch the Dow. Here’s the number that really captures the financial crisis [TED spread]
October 13, 2008 8:51 PM   Subscribe

The Dow went up today.. don't watch the Dow. Here’s the number that really captures the financial crisis [TED spread].

Bloomberg TED spread, chart.

Understanding the TED spread.

NPR 12-minute interview explains the TED spread (audio).

Previously on MeFi (comments).
posted by stbalbach (44 comments total) 14 users marked this as a favorite

 
Ted! Ted! Ted!
I's not as catchy as some terms, but I guess it'll do.
posted by Balisong at 8:55 PM on October 13, 2008


awwww, well, the big boys let the little guys panic and run for the door. then they fleeced em on the way out. happened today, as was clear it would. great day for making money at the expense of the sheep.
posted by jcworth at 9:05 PM on October 13, 2008


Ah, TED spread, don't be dead, dude.
posted by Citizen Premier at 9:09 PM on October 13, 2008 [1 favorite]


HaaaaaaveyoumetTed?
posted by pompomtom at 9:11 PM on October 13, 2008


Latest news : U.S. Investing $250 Billion in Banks.
posted by suckerpunch at 9:18 PM on October 13, 2008


My name is Ted and I approve of this post.
posted by twsf at 9:31 PM on October 13, 2008 [1 favorite]


And the bugmenot login I got for suckerpunch's link? 'mortgage' That's at least worth a small letter lol.

Seriously, though, I have some conspiracy theories about all this that I formulated around the time of the sudden WaMu 'sale.' I think that there are indeed some fundamental issues, but I also think someone is screwing with us on a grand scale, and I'm not usually one for conspiracy theories.

There is some real trouble in finance right now, but it's nowhere near as widespread as we've been led to believe. It seems to be focused on a few big banks, acquisition targets of some other big banks, and collateral damage from the drumbeat of depression. I have a feeling of being manipulated.

Note that I'm not saying that things are or should be all good, I've long been on the side of the bears, I just think the sudden implosion reeks of something hinky.
posted by wierdo at 9:34 PM on October 13, 2008


Yeah, I'm more spooked than comforted by the stock indices' meteoric rise. To phrase it in "lolcats" - Volatile Market is Volatile.

I may be a bough thrust into sodden earth, but I'd feel a lot more comfortable with a much flatter rate of recovery in a much longer recovery period. (If not years, at least a week or two.) Sudden spikes and drops are not predictable, and if you don't know which way the wind will blow today, you're not investing, you're gambling. So the money coming into the markets today are gamblers and wishful thinkers... and while they might have the right idea, it's because it's one of two times a day when their clock gives the right time. Better luck than management. Before I declare the party started, give me a long, steady trendline, or even a stable floor. We got neither. We have as much of a chance of a 900pt drop tomorrow as of another 900pt rise, or of the 10 minute candlestick graph showing Elvis's face in profile.
posted by Slap*Happy at 9:44 PM on October 13, 2008


Don't mean to pick on this thread in particular, but all this financial disaster pr0n is reminding me of that old saying about not sitting too close the TV because it will ruin your eyes.

Yeah, we're all fucked. I've learned and absorbed and am still processing that. But this obsession with day-to-day fluctuations and events - - it honestly strikes me as not unlike those sandpiper birds at the beach, focusing their entire beings on each approaching or receding wave.

Sure, the ocean as a whole may be retreating from the beach. Yeah, I've got that, and I've got that it's going to suck. Announcing the same thing over and over, though, doesn't change that. What do you want me to do? Commit suicide? Give up all my worldly possessions and walk about town, weeping, with a poster of Reagan? Turn my backyard into a sustainable organic farm? Buy gold rings and bury them in said yard?

Again, sorry, I don't mean to pick on this thread in particular -- it's the cumulative effect of all these "we're fucked" postings that's brought me to this point.
posted by treepour at 9:46 PM on October 13, 2008 [2 favorites]


What do you want me to do? Commit suicide? Give up all my worldly possessions and walk about town, weeping, with a poster of Reagan? Turn my backyard into a sustainable organic farm? Buy gold rings and bury them in said yard?

Well, if you're not fascinated by the financial events unfurling around you for their own sake, these threads probably aren't for you, in the same way the War Nerd columns are not for you if you're not fascinated by the global conflicts unfurling around you.

These are Big Doings, well beyond our control, and for many of us, picking over the wreckage gives us something to do to at least feel a little useful. You should figure out for yourself what you should be doing, or not doing. Not worrying about it too much is a valid option.
posted by Slap*Happy at 10:02 PM on October 13, 2008 [5 favorites]


I don't believe the implosion was sudden. It's been building since before the beginning of the year, and started to come to a head when the ARS auctions started to fail in February, 2008.

cf. Bob Chapman's post of 11th Oct. at The International Forecaster entitled "The Quadrillion Dollar Powder Keg Waiting To Blow".

A word of caution on Chapman: Reading The International Forecaster may induce depression, nausea, catatonia, or nervous breakdown. Please ignore the woo-hoo and read between the lines for the kernel of truth.
posted by ob1quixote at 10:07 PM on October 13, 2008


I particularly would like to know which investors pulled out of the market back in March- or last November, and so on. Who among us knew that the rug; almost seemingly on cue, would be pulled out from under the system; then watch the ants scamble on a hill for awhile; and at the right time, step back into the market.

History may show that this was one of the biggest heists in modern history.

Consolidate. Consolidate. Consolidate.
posted by captainsohler at 10:14 PM on October 13, 2008


It's not just the LIBOR rate or TED spread that's worrying. I'm more worried about the LIBOR spread. Mutant was saying before in a thread that there were sweet FA bids on the market for eurodollar contracts. If the LIBOR spread is quite large it would (at least IMHO) be a more accurate measure of current liquidity than either of those two statistics seeing as the LIBOR rate is just (Bid + Ask)/2.

Does anyone have a free online listing of the current/historical LIBOR bid/ask prices?
posted by Talez at 10:27 PM on October 13, 2008


"You killed Ted, you medieval dickweed!!"
posted by drjimmy11 at 10:40 PM on October 13, 2008


it's the cumulative effect of all these "we're fucked" postings that's brought me to this point.

What's interesting to me is that for the last 2 weeks the sky was falling because the Dow was down. Now that the Dow is up, the Dow doesn't mean anything?

Having a rational discussion of a disaster is one thing; cheerleading for it is just kind of silly.
posted by drjimmy11 at 10:42 PM on October 13, 2008 [2 favorites]


Well, if you're not fascinated by the financial events unfurling around you for their own sake, these threads probably aren't for you, in the same way the War Nerd columns are not for you if you're not fascinated by the global conflicts unfurling around you.

These are Big Doings, well beyond our control, and for many of us, picking over the wreckage gives us something to do to at least feel a little useful. You should figure out for yourself what you should be doing, or not doing. Not worrying about it too much is a valid option.


Slap*Happy, that's a very good point, thanks for that. I'm not fascinated by these threads and events -- I'm terrified and horrified by them, and not in a remotely pleasant way. Which probably does, as you suggest, mean these threads aren't for me.

On the other hand, these threads seem not so much about fascination with disaster, but rather with getting a high off of anxiety. Which is fine, but I do way too much of that on my own. So in that sense too, it's also true that these threads aren't for me.
posted by treepour at 10:46 PM on October 13, 2008 [1 favorite]


What's interesting to me is that for the last 2 weeks the sky was falling because the Dow was down. Now that the Dow is up, the Dow doesn't mean anything?

Different indicators for different sections of the economy or, if you prefer, horses for courses.

The DJIA is great to watch if you're worried about the worth of your 401K. It won't tell you dick about market liquidity (which is what the current problem is). The DJIA might be doing great because the traders are following each other like lemmings trying to get back into the market and finally make some cash but unless banks are lending money again your small businesses are still going to be turning the lights off and shedding staff when their lines of credit all but dry up and there's not enough cash on hand to pay the wages for that week.
posted by Talez at 10:47 PM on October 13, 2008 [1 favorite]


What's interesting to me is that for the last 2 weeks the sky was falling because the Dow was down. Now that the Dow is up, the Dow doesn't mean anything?

I know. Politicalfilter, but what about all the Club for Growth stuff about the Dow reflecting fear of an Obama presidency? Did Barack suddenly pull out of the race or sump'n?

treepour, I'm actually trying to look for hints here and there about how my own and my parents' financial situation is going to be affected in the '09-'10 stretch. There's a lot of stuff to get organized with them regarding investment properties, retirement funds, and so forth, and somehow none of it seems wholly divorced from this crisis unlike some past blips that seemed confined to certain market segments. It's immediate and concrete for me, in other words.
posted by dhartung at 11:20 PM on October 13, 2008


I agree, everyone's getting too high on anxiety lately. Amongst other things I blame the internet; too much over-stimulation at an unnatural pace. I don't think our minds are biologically able to process the exponential shifts technology and communications have gone through the last 15 or so years. Sadly, the main reason I think we/America/Planet Earth is doomed is because everyone keeps predicting that it will be. It's like people almost want something bad to happen, either to get it over with or just to know what's coming next. None of my friends even care there's an election in 3 weeks, everyone's mind is somewhere else these days. 7 years of disillusionment is a lot to go through in the digital age.
posted by andruwjones26 at 11:32 PM on October 13, 2008


treepour, I'm actually trying to look for hints here and there about how my own and my parents' financial situation is going to be affected in the '09-'10 stretch. There's a lot of stuff to get organized with them regarding investment properties, retirement funds, and so forth, and somehow none of it seems wholly divorced from this crisis unlike some past blips that seemed confined to certain market segments. It's immediate and concrete for me, in other words.

What I don't get is how people can be so close to retirement and have bullshit amounts invested in growth assets like shares or property. Has my super gone down? It's been slashed to the bone but my fund will recover over time. I'm only 25 and I've got years of saving left ahead of me. If I was in my 50s? You can bet your ass I'd have at least 70% of my fund in defensive assets. If I was in my 60s? 70% of it would be in cash straight out.
posted by Talez at 11:34 PM on October 13, 2008


There is some real trouble in finance right now, but it's nowhere near as widespread as we've been led to believe.

I don't have any real grip on this, but what do you do when everyone lent out billions of dollars to eg. strawberry pickers who bought $700K houses, and, what's worse, the only reason why middle-class houses went up to $700,000 in the first place was that lenders and lending had gone insane?

Wells Fargo and BofA still have tens of billions of skeevy assets on their books, enough to take them out if they can't whistle by the graveyard successfully. Don't even get me started on Citi.

What's interesting to me is that for the last 2 weeks the sky was falling because the Dow was down. Now that the Dow is up, the Dow doesn't mean anything?

I'm an ultra-bear, and back in June I thought we'd fall to 1050 by the end of the year . . . we were at 1045 a couple of hours ago in the aftermarket, but they've got the jitters now and are down to 1030 or so. Should one peruse a chart of the 2000-2003 market one will see that markets don't collapse in a straight line, there is alternating waves of despair and euphoria, all the way down to some point where the turnaround is found and confidence is created that the economic bad news is behind us.

The present recovery is due to the belief that a coordinated international banking effort will improve the access to credit and keep the wheels on our economic cart, such as it is.

Given inflation etc, we may be at the bottom now, or the bottom may be another 600 S&P 500 points down again. Nobody can know the answer to this question.
posted by troy at 11:39 PM on October 13, 2008


The financial posts are frequent, but probably justified as the stuff going on is BIG.
The market rally is probably because the equities people think the chances of systemic failure have declined, that is, they think the sharemarket will still be open in a few weeks.
In the last few weeks there have been real questions over whether the financial system will hold up. The co-ordinated EU bank support and the *unlimited* liquidity now available make that outcome less likely.
That said, I am skeptical that the rally is justified, there is still a looming recession and potentially very high inflation (likely to be caused by the unlimited liquidity cure!)
posted by bystander at 12:07 AM on October 14, 2008


This article informs us: Thus, the TED Spread should fall. If not, it will remain unusually high, possibly rising even further.

Very profound. Almost tautological.
posted by ikkyu2 at 12:29 AM on October 14, 2008 [5 favorites]


The Dow went up today.. don't watch the Dow.

"Give him the stick -- DON'T GIVE HIM THE STICK!!!

OOOOOOOOO!
posted by dirigibleman at 12:38 AM on October 14, 2008 [2 favorites]


troy writes: I don't have any real grip on this, but what do you do when everyone lent out billions of dollars to eg. strawberry pickers who bought $700K houses, and, what's worse, the only reason why middle-class houses went up to $700,000 in the first place was that lenders and lending had gone insane?

Wells Fargo and BofA still have tens of billions of skeevy assets on their books, enough to take them out if they can't whistle by the graveyard successfully. Don't even get me started on Citi.


Yet, oddly, despite all the despair, up to this point (and certainly back when the trouble hit) the wave of foreclosures hasn't actually been all that large. It's not as if half of these loans are going bad. Yes, there are a lot of shitty loans, but they make up much less of the bubble than one would expect from the angst spewing forth from every angle.

Now, there are some markets that are particularly hard hit, ones that haven't been doing well for 30 years, aside from the last several when there was so much free money floating around it was hiding the problems, like the rust belt, and the extreme growth markets in Florida and California.

In the middle of the country, things are bad, but not terrible by any means.

I honestly think we're in a runup to the Iraq war sort of situation. We've been shocked by something unexpected by most (but not all of us) and are now in extreme overreaction mode, doing basically all the wrong things, and in many ways making the problem worse with our panicky response.

And there's a pretty good chance there's some active malfeasance in causing the difficulties right now and in trumpeting its magnitude (ala WMD), but I can't yet prove it. Whether it's for a last ditch looting before Obama takes over, a ploy to put him in an impossible situation, both, or a setup for something else can't be seen yet (at least by me).

And why is it that small/medium banks seem perfectly willing to loan, and (based on their interest rates) don't seem all that desperate for capital, yet the big boys have puckered up so tight that the strategic petroleum reserve sized gusher of Astroglide hasn't loosened them up a hair's breadth? Well, except when they are buying banks the regulators suddenly claim are extremely distressed, yet still just slightly under well capitalized, and would be fine were it not for the constant drumbeat of impending doom coming from certain sectors.

I'd better go to bed before I come up with any more wacky ideas.
posted by wierdo at 1:23 AM on October 14, 2008


What's interesting to me is that for the last 2 weeks the sky was falling because the Dow was down. Now that the Dow is up, the Dow doesn't mean anything?

Who said that? The Dow is up 10% after dropping 30% If it keeps up for a couple more days it might be interesting, but it's hardly 'recovered'.
posted by delmoi at 1:31 AM on October 14, 2008


Wow thanks for posting this. Looking at the markets this AM I'm also amazed at the size of the bounces; yesterday the S&P 500 closed up 11.53%, overnight the Nikkei bounces up over 14% and The DAX - only about one hour into the trading day mind you - is trading up about 11%. Now this is a relief rally!

But looking at The Ted Spread and other metrics (e.g., The US Yield Curve) is still seems we've got some liquidity issues - the 3M T-Bill is still trading to yield about 0.18%, the near historic lows indicating record amounts of fear amoung market participants. Overnight LIBOR is very volatile (click on the 3M and 1W buttons for a good overview), and overnight LIBOR is still about 325 basis points higher than it should be.

Ok, heres my view. In normal times I'd go with the old maxim "Don't fight The Fed", but there are lots of strange things going on in the markets these days that have me a little concerned.

First of all, in spite of what some folks have opined about this most recent stock market crash being totally unexpected, the facts don't support that view; we do know that several trillions dollars were lined up to short the market. These folks clearly profited big time from all the fun and excitement. How they're lining up now, I don't know for sure (but I've got a few ideas).

Second, for about sixteen months, the big trade that everyone was piling into was to short the banks / go long oil. Turned out that was a money pump, but that trades over now so what are they targeting? That brings up to point

Three, the big funds thrive in unexploited niches, and we know that volatility is now attractive. In fact, "Many fund managers have been strengthening their capabilities to trade this previously ignored asset class.", the quote in question referred explicitly to volatility (correlation has also been targeted, but trading correlation won't rock the world as much as volatility).

Let's look a little closer at recent events. Before last week (the worst week ever for The Dow Jones, down 18%, in case that hasn't already been beaten into you) the worst performing week was observed in 1933.

At the open Friday we saw The Dow drop 697 points, following in the footsteps of Thursdays 678 point decline. By 10:15AM, however, the market was actually trading up, and in fact swung as high as 322 up during intraday trading.

While it closed down 127 points for the day, we observed enormous swings in point value (you work out the percentages) from -697 to +322, or about 1,018 points - the biggest single day swing EVER observed. And then, of course, we've got yesterdays global bounces.

So I'd say buckle up for more market volatility, meaning big swings each way and maybe everyday. Hopefully it will all settle down but I'm not really convinced that it will in the near term. When folks start trading volatility they make money no matter which way the market moves - as long as it moves.

But I do agree with andruwjones26 about anxiety; its almost never ending, not only the bad news but the wave after wave of "pundits" and "experts" who are interpreting the events and seemingly preparing us all for The Great Depression 2. I'm not sure it's that bad and we don't have to discuss the evidence (we'd probably largely agree); just look at the policy responses. Again, going back to last week: So unlike 1929 we see the Federal Governments policy response have been aggressive and fairly fast; I don't know how much quicker they could have moved. If we do end up seeing Great Depression 2, this won't be your great fathers depression - I know thats not a consolation but there you go.



You folks know that I always try to look on the bright side of these things - I spent so much time working on the ground down in Africa I've seen just how bad bad can really be - and in the grand scheme of things, recent events aren't that bad. Here some "good news" I can toss out there, FWIW:

First of all, everyone, absolutely everyone is getting a lesson in finance. I've got so much data and stuff to digest I may have to extend my year off to give this task the attention it deserves. And people who aren't Students of The Markets are getting a sorely needed lesson, learning that their home aren't ATMs, the stock market is NOT a proxy for a savings account, debt is bad and cash is king. This is GOOD.

Second, everyone's learned that most stock brokers really don't make you money, and in fact shouldn't be blindly obeyed; you've gotta be critical of the advise you're receiving, otherwise you end up like all the poor folks that were sold Auction Rate Securities.

And finally, even the big names aren't invulnerable; speculation aside about a resurrection (I've got a £100 bet saying it will happen), Bear & Lehman gone, who would have thought that possible last January? A little skepticism is not only healthy, it's essential when participating in the Capital Markets.


Folks were too trusting for too long. The Regulators were asleep, not doing their jobs, what ever. But they've been roused, and I've got great hopes that they're gonna fix this mess once and for all. Many of us working in the field weren't happy with all the dodgy stuff going on at the big banks and funds. Now, perhaps, we've got the political backing to change things, to reinvent some aspects of the financial system we all find ourselves part of.

A line from Plato's Apology of Socrates resonates with me at this moment:
"...by teaching them not to believe in the gods in whom the city believes, but in other new things."
posted by Mutant at 1:34 AM on October 14, 2008 [6 favorites]


Mutant: BOJ not rate cutting? Perhaps trying to unwind the carry trade? Certainly I've seen my Aussie dollars buying less with the flight to US treasuries. Possible motivation would be to liquidate those trades to prop up the issue of new bonds to support Fed bailouts? Although that requires more central bank cooperation than I would have expected...but these are interesting times.
posted by bystander at 3:09 AM on October 14, 2008


The market rally is probably because the equities people think the chances of systemic failure have declined, that is, they think the sharemarket will still be open in a few weeks.
Or they're covering their shorts after the ban was lifted Thursday morning.

That said, it's human nature for stock traders to believe the market will still be open in a few weeks, no? How could they even get out of bed, shower and shave, put on a suit and go into work otherwise?
posted by ob1quixote at 3:32 AM on October 14, 2008


here's another interpretation :P
LIBOR serves as the basis of many thousands of private sector contracts, and that the banking system as a whole is a net receiver of LIBOR-indexed funds. To the degree that LIBOR does not reflect banks effective cost of funds, an elevated rate can be viewed as a hidden tax of the nonfinacial [sic] sector by banks. Rather than reflecting the banking system's pain, a high LIBOR might indicate banks' ability to leverage their collective insolvency to charge higher rates on nonfinacial firms without complaint.

...since US banks can borrow from the Fed's discount window at the Federal Funds rate + 25 basis points, while adjustable rate loans from banks are often indexed to LIBOR, a simpler way to think of the LIBOR-OIS spread is as a measure of the difference between the cost to banks of central bank money and rate they charge on private loans. Put this way, it is hard to understand why banks are upset that this indicator is elevated.
cheers!
posted by kliuless at 4:33 AM on October 14, 2008


Wow thanks for posting this. Looking at the markets this AM I'm also amazed at the size of the bounces; yesterday the S&P 500 closed up 11.53%, overnight the Nikkei bounces up over 14% and The DAX - only about one hour into the trading day mind you - is trading up about 11%. Now this is a relief rally!

Bear market rally.

Seriously. When the market's bulling along fine, you don't leap 5% -- much 11%. You notch half a percent, maybe 1.5% on a good day. You just do so four days out of five, ending up 3-5% up for the week, week after week.

Those days where you run up the records? They happen in down markets.

I'm not that surprised they ran up 11% -- not after last Wednesday, where every technical indicator in the world said Buy!, but the markets came up to the plate Thursday and collapsed, then the 1000 point swing on Friday.

So we were oversold after Wednesday -- and then went down *another* 900 points over Thursday and Friday.

In light of that? 1000 points up on Monday isn't that dramatic. It's still a market run on fear and uncertainty.
posted by eriko at 5:31 AM on October 14, 2008


It looks like Bloomberg has stopped providing the TED spread for free: "Bloomberg does not provide a quote on Bloomberg.com for the security you entered." Any other sources?
posted by exogenous at 5:37 AM on October 14, 2008


exogenous, works for me: http://www.bloomberg.com/apps/quote?ticker=.TEDSP:IND
posted by stbalbach at 6:13 AM on October 14, 2008


(BOJ sat this one out though - anyone got a take on that?)

Stab in the dark but the Japanese base borrowing rate is already at 0.5%. If they were in a round of rate cuts they'd only really be able to make one before lowering the rate to zero. They could bring the rate negative if they really wanted to but at this point they only have one real shot so they would want to make it a good one.
posted by Talez at 7:40 AM on October 14, 2008


Dead Cousin TED
posted by BaxterG4 at 8:14 AM on October 14, 2008


When the TED spread hits 2, the market will rally like a mother fucker. Don't expect that for a while.
posted by gman at 8:50 AM on October 14, 2008


No joke: I thought everyone was talking about TED, and was very confused.

Just to try to catch up: low TED = good, right? The climb I see here is the Bad Thing we are all talking about?
posted by paisley henosis at 8:53 AM on October 14, 2008


My name is Fred.
They call me Fred.
When I gauge the economy
I pay attention to ____.
posted by Mental Wimp at 10:18 AM on October 14, 2008


Mutant - thanks as usual for your distillation. question:

if the banks not lending is really the center of the proverbial gordian knot, how can there be a liquidity crisis (of confidence or to cover their calls or whatev) among banks when there's simultaneously so much extra wealth/cash/beans sloshing around in markets as evidenced by the market losing 1 trillion one day, then gaining it back the next?

and while I'm at it -

a favorite Krugman quote for the day (from '98):

"The basic idea of "evolutionary psych" is that our brains are exquisitely designed to help us cope with our environment - but unfortunately, the environment they are designed for is the one we evolved and lived in for the past two million years, not the alleged civilization we created just a couple of centuries ago. We are, all of us, hunter-gatherers lost in the big city. And therein, say the theorists, lie the roots of many of our bad habits. Our craving for sweets evolved in a world without ice-cream; our interest in gossip evolved in a world without tabloids; our emotional response to music evolved in a world without Celine Dion. And we have investment instincts designed for hunting mammoths, not capital gains."
posted by ilovemytoaster at 11:56 AM on October 14, 2008


The Dow's suckin' again today. So I'm going to feel all doomy and gloomy again. Suck it, glass half full sorts! (Seriously, though. Times are not good. Your local bank is still giving out loans? How many loans have you tried to get, exactly? Aren't mortgage lenders asking for bigger down payments pretty much everywhere? You know the state of every local bank in the US, regardless? For some of us, Wachovia was a local bank. It was with me once.)
posted by raysmj at 11:58 AM on October 14, 2008


Question: If governments are now just giving banks money directly, why would banks borrow from each other at all? And hence, what meaning do TED & Libor now have? If banks are not borrowing from each other because they're getting fed cash, what is TED now measuring? Does it tell us anything at all?
posted by staggering termagant at 12:50 PM on October 14, 2008


Based on the Bloomberg chart, the TED spread rose very gradually for years (around 0.1 basis points per year), then jumped two full points in the first few days of August 2007. In contrast, it has risen about three points in the past five weeks.

I've heard plenty about the recent crisis, but what happened in early August 2007?
posted by IAmHumblerThanYou at 1:31 PM on October 14, 2008


what happened in early August 2007?

I guess it pays to RTFA...
posted by IAmHumblerThanYou at 1:36 PM on October 14, 2008



ilovemytoaster -- "if the banks not lending is really the center of the proverbial gordian knot, how can there be a liquidity crisis (of confidence or to cover their calls or whatev) among banks when there's simultaneously so much extra wealth/cash/beans sloshing around in markets as evidenced by the market losing 1 trillion one day, then gaining it back the next?"

Different markets. Lending is one business and share trading (as well as bond investing, etc) are largely separate businesses. I say largely as there some some strategies that will deploy capital into multiple markets but on the whole, they are distinct.

Also market has different participants, so the folks tossing around large sums of money in the equity markets each day aren't necessarily the same parties that do interbank lending, nor are the pools of capital identical (i.e., just because some firms don't have money to lend other banks doesn't mean they don't have it to trade equities. And the motivation to trade is different as well, with institutions hoping to profit from cheap shares, maybe taking the opposite view and shorting or even trading market volatility itself, while retail money hopefully isn't panicking too much (not convinced though, thinking back upon questions from some friends).

Finally, each market itself is by no means monolithic either; for example, while some parts of lending came damn close to, if not totally froze up (although we're seeing positive signs with overnight LIBOR at its lowest since November 2004, but still about 50bps higher than it should be) while we didn't seem difficulty in other segments.

Parts of the system that dealt with bank lending money to each other simply froze, and that rippled out into the broader business environment.

Hey that's an interesting Krugman quote; hadn't seen it before, many thanks.
posted by Mutant at 8:56 AM on October 16, 2008


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