You still don't understand. The Fed sets a funds target rate as the expected overnight inter-bank lending rate. The actual rates are expected to be close to that. Your chart closely charts what the Fed target rate has been over the past decade, until recently. When things were going good, the Fed increased rates to curb inflation. When we entered a recessionary period, the Fed started to cut rates to infuse the system with money. What we are seeing today is unprecedented: a rapid divergence between interbank offered rates and the Fed target rate. That means that banks don't want to lend each other money anymore. That is why there is a credit crisis. The issue is not the actual value itself, the issue is the SPREAD. It's the same reason that credit default swap spreads are widening alarmingly every day. Hiding your head in the sand won't go away. The credit freeze is real. If this bill doesn't pass, don't be surprised if banks start to close up shop next week to stave off the runs.
Would this be better? http://www.bloomberg.com/apps/news?pid=20601082&sid=aBxs213UjqjA&refer=canada Libor Rises a Fourth Day as Banks Hoard Cash After Bill Passed Oct. 2 (Bloomberg) -- The cost of borrowing in dollars in London for three months rose for a fourth day, signaling that banks haven't started to lend after the U.S. Senate approved a $700 billion plan to rescue beleaguered financial institutions. The London interbank offered rate, or Libor, that banks charge each other for such loans climbed 6 basis points to 4.21 percent today, the highest since Jan. 11, the British Bankers' Association said. The corresponding rate for euros advanced 3 basis points to a record 5.32 percent. The Libor-OIS spread, a gauge of cash scarcity among banks, widened to a record. ``We still see upward pressure on maturities from one week,'' said Patrick Jacq, a fixed-income strategist in Paris at BNP Paribas SA, France's biggest bank. ``The situation is still blocked and we're unlikely to see spreads decline before confidence has been restored.'' Credit markets have frozen as financial institutions hoard cash to meet future funding needs amid deepening concern that more banks will collapse. Libor, set by 16 banks in a daily survey by the British Bankers' Association, is used to set rates on $360 trillion of financial products worldwide, from home loans to derivatives. The U.S. Senate passed the Bush administration's bank- rescue package yesterday with inducements for the House of Representatives to approve the measure after an earlier version was rejected. The legislation, approved on a 74-25 vote, authorizes the government to buy troubled assets from banks rocked by record home foreclosures. Bank Rescues Interbank rates have soared as governments in Europe and the U.S. rescued six financial institutions in the past week. The Libor-OIS spread, the difference between the three-month dollar rate and the overnight indexed swap rate, widened to a record 260 basis points today. It was at 197 basis points a week ago and 79 basis points a month ago. Lenders are balking at offering cash for longer than a day even as central banks pump an unprecedented amount of cash into the banking system. The European Central Bank today offered $50 billion of overnight cash at a marginal rate of 2.75 percent. The Swiss National Bank awarded $9 billion. The Bank of England sold $8.9 billion. The Libor for overnight dollars fell 111 basis points to 2.68 percent, the BBA said. Rates in Asia rose earlier. The cost of borrowing in dollars in Singapore for three months surged to 4.16 percent today, the highest since Jan. 11. The rate in Hong Kong, known as Hibor, climbed 13 basis points to 3.79 percent. Markets `Frozen' ``There are a lot of bids but no offers,'' said Pang Meng Yam, a money-market dealer at KBC Bank NV in Singapore. ``There's no lending, most money markets are frozen and the discrepancy between the benchmark rates and the actual trading rates are getting wider.'' Financial institutions worldwide posted $588 billion of writedowns and losses tied to U.S. subprime mortgages since the start of last year, according to data compiled by Bloomberg. The difference between what banks and the U.S. Treasury pay to borrow money for three months, the so-called TED spread, was at 336 basis points today. The spread was 110 basis points a month ago. To contact the reporters on this story: Gavin Finch in London at gfinch@bloomberg.net; Lukanyo Mnyanda in London at lmnyanda@bloomberg.net These are changes that have taken place in the last few weeks. Two more months of this and the economy is gone.
Rim, the need for prevention of a repeat is pretty much moot since the investment banks that got us into this mess don't exist anymore and the fact that no one would touch a new subprime mortgage investment. It's almost certain that either new administration will enact banking regulations. I agree that the bailout is a crappy crapshoot but a guaranteed receesion or depression will have repercussions for average Americans far beyond $700 billion. If there is no credit there is no housing market and prices will fall precipitously. Every county and city raises their revenue from property taxes which means every city and county will face funding shortages and bankruptcy. That means under or unfunded schools, services... fire police trash collection sewage treatment etc. etc. etc.; a downward spiral for the American way of life. The question on waiting is how far down the spiral goes before it is iretrievable.
Actually I do understand. I also understand that quite a bit of the lending problem has do to with the fact that the bailout exists but isn't passed. It is in that interm period that the problem got bad. Kill the bailout and it gets worse for a while. Then it gets better. And life goes on. You still don't understand what I'm saying, apparently.
This doesn't make any sense. People are more scared to lend in a situation where they might be relief coming than they would be if there were no relief coming? Yes - the reason the bailout was announced is because they saw that hell was about to break loose. And in the interim, hell has started to break loose.
You're confusing cause and effect. The cracks started appearing and bandages weren't stopping problems...we went from Bear Stearns to opening the borrowing window to Fannie to this. If the bailout was off the table, you'd see the lending rates go through the roof as the risks of lending go up. Worse for a while makes it sound like a cold. This will setback economic/social progress 10 years. When you lose $, you quickly become paranoid and gun shy on any investment, etc.
Yes. There is an uncertainty premium that looms like a 400 pound Gorilla. If a bailout wasn't passed, at least people could legitimately predict future conditions. Great uncertainty causes people to sit on the sidelines. It always has. This isn't some new concept I'm introducing here.
But you're suggesting that the uncertainty is causing lending rates to be worse than they would if you just assumed the worst case scenario. There absolutely is an uncertainty premium - but the rates aren't going to be higher than the rates would be if we got certainty that the worst case scenario was happening.
I've heard someone, who's a lot smarter than me, and pays a lot closer attention than I do, that said when the bailout was put on the table, many banks stopped selling the bad securities. They weren't really illiquid, but aren't worth more than 20-30 cents on the dollar on the open market. If a bank thinks that the government would buy their bad assets for 50-70 cents on the the dollar, they'd be stupid to sell them for 20-30 cents now. So even banks that desperately need to these securities off the balance sheet will hold onto them, praying that they can make it until Paulson gets his big payday.
Yes, it will get worse when people panic, and then there will be great deals with top notch return for smart people and it will whip back to getting better within a couple of years. If you live by flipping houses in California or any of the other real estate bubble markets, it sucks for you and you never recover, but for the rest of the world things cycle like always. Conversely, if you pass the bailout and keep trying to prop the economy you get a 10-15 year extended malaise like the Japanese.
Nice attempted ambush otto but you're firing at a shadow. I know that LIBOR itself has been higher - I'm talking about the LIBOR OIS spread, which has never been higher in history. The graph for this looks like this no matter how far out you draw the graph: ___| I can't find a good chart of today's LIBOR-OIS spread that I am able to use, but let me give you some perspective, here's some historical evidence: Note it started when the first subprime meltdown signs in summer 2007. The LIBOR-OIS spread today was 270 bp - 2.7%. It is literally off the charts.
I would add 2 reasons why we cannot wait 6 months and let the debate continue. First, this started as a 3 page bill. The version defeated in the house was over 100 pages long. The version passed by the senate is supposedly 451 pages long. Can you imagine the 50,000 page tome that will be created by 6 months of work? It would accomplish nothing. Second, this is really bailing water on a ship as pointed out before. I think we are facing a situation similar to 1930. If in 1930 our government had guaranteed all bank deposits (like Ireland just did), we may have improved things for a lot of Americans during the depression. I think we are facing a similar situation now. If we can act now by improving liquidity, bad things are still going to happen, but hopefully we will avoid spiraling downward out of control. As someone who is generally very fiscally conservative, I rarely agree with Sam Fisher, but he and JeapordE are completely correct in this matter.
No, there's no credit crunch. Schwarzenegger to U.S.: State may need $7-billion loan In a letter obtained by The Times, the governor warns that tight credit has dried up funds California routinely relies on and it may have to seek emergency aid within weeks. SACRAMENTO -- California Gov. Arnold Schwarzenegger, alarmed by the ongoing national financial crisis, warned Treasury Secretary Henry M. Paulson on Thursday that the state might need an emergency loan of as much as $7 billion from the federal government within weeks. The warning comes as California is close to running out of cash to fund day-to-day government operations and is unable to access routine short-term loans that it typically relies on to remain solvent. The state of California is the biggest of several governments nationwide that are being locked out of the bond market by the global credit crunch. If the state is unable to access the cash, administration officials say, payments to schools and other government entities could quickly be suspended and state employees could be laid off. Plans by several state and local governments to borrow in recent days have been upended by the credit freeze. New Mexico was forced to put off a $500-million bond sale, Massachusetts had to pull the plug halfway into a $400-million offering, and Maine is considering canceling road projects that were to be funded with bonds. California finance experts say they know of no time in recent history when the state has sought an emergency loan of this magnitude from the federal government. The only other such rescue was in 1975, they said, when the federal government lent New York City money to avoid bankruptcy. "Absent a clear resolution to this financial crisis," Schwarzenegger wrote in a letter Thursday evening e-mailed to Paulson, "California and other states may be unable to obtain the necessary level of financing to maintain government operations and may be forced to turn to the federal treasury for short-term financing." The letter, obtained by The Times, came on the eve of a vote by the House of Representatives on a $700-billion rescue package, but it was too soon to know how the package would affect the nation's paralyzed credit markets. The Senate approved the so-called rescue bill Wednesday night. A top Schwarzenegger aide followed up the letter with a call to the Treasury secretary Thursday night. Treasury Department officials could not be reached for comment. It's customary for California to borrow billions of dollars at the start of the fiscal year to fill its coffers until the usual flood of sales tax receipts comes in after Christmas and income tax receipts arrive in the spring. "California is so large that our short cash-flow needs exceed the entire budget of some states," Schwarzenegger wrote. The cash needs to be in the state's bank account by Oct. 28 to be available to fund a scheduled $3-billion payment to more than 1,000 school districts. Said Matt David, Schwarzenegger's communications director: "California faces the potential of a perfect storm created by the financial crisis' effect on liquidity, lower-than-anticipated revenues currently coming into the state, and our late budget. The governor is taking steps to prepare for this scenario to ensure that the state can make critical payments." But those payments won't be forthcoming if the state can't do routine borrowing. For now, "the window is shut, and if it stays shut, we are in deep trouble," said an administration official, who asked not to be identified, citing the sensitive talks with Washington. Quick passage of the rescue bill by the House of Representatives today and a signature by President Bush could inject more money into the international financial system and allow California to borrow at a reasonable interest rate, the official said. But there are no guarantees that the economic recovery plan before Congress will succeed, said California Treasurer Bill Lockyer, who has been working with Schwarzenegger to keep the state solvent. Asking the federal government for a loan "is one option on the table," said Tom Dresslar, a spokesman for Lockyer. The treasurer, he added, is working with outside financial advisors on a possible emergency plan to sell short-term debt notes to the U.S. government. Lockyer believes that such a plan is both feasible and legal, Dresslar said. "I don't think we have ever gone to the feds," said Fred Silva, senior fiscal policy advisor with California Forward, a state budget think tank. Silva said the closest California came may have been in the days after the 1994 Northridge earthquake, when at the request of the state, Washington sped up payment of federal funds that the state was owed. State officials now fear they face a potential cash crisis worse than California confronted in 2003, in the final days of Schwarzenegger's predecessor, Gov. Gray Davis. At that time, the precipitous decline of state revenue in the middle of a budget year forced officials to pay a syndicate of banks a premium of hundreds of millions of dollars for what amounted to an expensive "payday loan." Even that option, administration officials say, would not be available during the current credit drought. They say if Congress does not approve a bailout plan -- and maybe even if it does -- there will be no lenders available to provide the state with the money it needs, regardless of the premium the state is willing to pay. "We need to go as wide as possible to try to find buyers at reasonable rates," said Robert Fayer, an attorney advising the state on its planned $7-billion bond sale. "Whether it could ultimately be the federal government, I have no idea. It is a fairly radical concept." Let's just wait a couple of months - no big deal!
Texas should offer California the payday loan, on the condition that Pelosi instruct Democrats to vote against the bailout.
