LIBOR explained

Recently, most heads have been turned toward the Dow Jones Industrial Average; but a few others have been closely watching the "LIBOR spread." [A notable exception is the U.S. House of Representatives, whose heads were in a completely different place -- and that includes my congressman's.]

The so-called LIBOR spread is the credit-freeze indicator. The bigger the spread, the closer we are to shutting down main-street commerce, just because of the business equivalent of a lack of pocket change. (Shutting down main-street commerce is like shutting down a big factory: it takes quite a while to get it going again.)

LIBOR is the rate at which banks are willing to lend to each other. When they are afraid to do that, they tend to park their money in risk-free, short-term US Treasuries (which usually track closely with the target fed funds rate). The "spread" is the difference between those rates. The chart above, which I clipped from the Bloomberg link below, compares LIBOR to the Fed Funds target. Many watch LIBOR vs short-term US Treasuries. In both cases, a big spread indicates a preference for parking money in a safe place instead of risking it on lending pocket change to businesses and other banks. 

Bloomberg's explanatory graphic is at this page...

...and they publish the LIBOR rates, and others, at this page.

LIBOR has been taking baby steps downward in recent days; short-term treasuries remain steady at around one-quarter percent.

Comments

[CornFuzed]

Is the following from Hazlitt correct??

In other words, government will borrow the money from private capital markets.

As Hazlitt points out, though, the private capital markets (those that aren't bankrupt and standing in line for a bailout) would otherwise lend their funds to more-productive ventures. If private capital wants to lend directly to the failing banks, it is already capable of doing so. The fact that such private capital is not lending to the banks is a clear indication that the government's current bailout is contrary to free-market principles.

The argument that the government is somehow pumping new capital into the market is absurd. Government is actually borrowing the money from the capital markets that it is in turn injecting into the capital markets. There is no additional source of funding; there is only a diversion of funds from more-productive outlets to less-productive outlets, with government acting as the middleman.
Economics in One Lesson

$14 $12
Treasury Secretary Henry Paulson needs to read this book.

So when Henry Paulson argues that it is necessary to pump money into credit markets to prevent them from freezing up, he doesn't bother to realize that the money he pumps into the credit markets is coming directly out of the very same credit markets. He is doing little more than rearranging the deck chairs on the Titanic; shuffling the money from one set of financial intermediaries to another does not increase either liquidity or solvency. It merely delays the problem for a few brief moments

[Optimist123]

Cornfuzed:

First: I like Hazlitt's book because he hammers away at the all-important point that what counts is what is produced -- period. Said another way: It's not the money, it's *what we get* for the money.

That said, I must disagree with the premise that there is a fixed amount of dollars available for investment (essentially, the quantity theory of debt+equity). The US Treasury can sell as many bonds as necessary; what will change is the interest rate it has to pay on those bonds, and that rate depends, more than anything else, on public confidence in the US economy's future: the higher that confidence, the more borrowing capacity the Treasury has. Today's low interest rates on Treasury instruments indicates a flight to safety, i.e., higher confidence in those than in investing in anything else, including equities. Everybody *wants* Treasuries, that's why they're bidding interests rates down; our govt is *not* ramming them down the bond-buyers' throats.

Why shouldn't the government take advantage of that opportunity to help loosen up the main-street credit logjam that threatens our economy (as well as the global economy)?

Again, it is our economy's *future* that will generate the tax revenues to pay the future interest on whatever extra debt the unfreezing actions create today. And, by "our economy's future," I mean exactly what Hazlitt means: our future ability and desire to produce more real goods and services than we would have produced otherwise. (And if we don't unfreeze the credit markets, "otherwise" will NOT be pretty.)

Today's circumstances are almost unprecedented. But governments are acting in the right directions. Sure, it won't be perfect, and there will be plenty of anecdotes about waste, fraud, etc., for the 20-20 hindsight crowd to moan about for decades -- while they avoid any mention of the catastrophe that was successfully avoided by leaders with the courage to act quickly in uncharted territory.

Acting to prevent something really bad takes courage, because it's impossible to prove after the fact that "something really bad" was in fact prevented; consequently, not only is no credit is awarded for doing it, but it gives second-guessers fertile ground for plying their trade. Nonetheless, I'm glad that sufficient political courage prevented a thermonuclear war between superpowers; I'm also glad it appears to have prevented Great Depression II. I wish enough of it had been mustered to prevent 911, but it wasn't; our future productive capacity would have been that much greater, because of the subsequent resources that could have been redirected. Looks like two out of three in my lifetime is what I'll have to settle for.

[goy]

- "Acting to prevent something really bad takes courage, because it's impossible to prove after the fact that "something really bad" was in fact prevented; consequently, not only is no credit is awarded for doing it, but it gives second-guessers fertile ground for plying their trade."

Ain't that the truth.

Someone should explain this concept to the crowd who've made careers out of second-guessing Bush's leadership in 2002/03 regarding Saddam.

I don't believe for a minute that if the asset swap plan is dragged south by partisan agendas (should we get a Dem President and fili-proof Dem Congress), that "Bush's Plan" (like "Bush's War") won't be blamed for the ensuing economic meltdown.

I second the request in the previous post's comments Steve. We've gotten plenty of short answers from anyone with a finger to point (I hear CRA and related motivation mentioned a LOT, and it seems like a big part of the cause). What's the 'long answer' about what led to this seemingly sudden crisis?

[millhead]

Steve, I understand your logic about "acting to prevent something really bad takes courage". That said, history will decide whether Paulson's *demands*, as reported in the WSJ,

http://online.wsj.com/article/SB122402486344034247.html

will play out effectively. I can tell you this with certainty, it took massive gonads to tell the heads of the surviving banks Blankfein, Dimon, Lewis, Mack, Stumpf and Pandit that "you have no choice, you ARE going to be a part of this plan".

Personally, I fear his proposed solution of the government providing capital and demanding that banks loan is not striking at the root of the issue: poor monetary policy.

We are going through a massive correction and it's going to get worse - this *needed* to happen.

Flooding the market with government "digital" dollars, IMO, is a band aid solution to a gaping wound problem...as Cornfuzed said, "we are doing little more than rearranging the [financial] deck".

[Laissez Faire]

Steve says..."That said, I must disagree with the premise that there is a fixed amount of dollars available for investment (essentially, the quantity theory of debt+equity). The US Treasury can sell as many bonds as necessary; what will change is the interest rate it has to pay on those bonds, and that rate depends, more than anything else, on public confidence in the US"

Real credit comes from real savings. For somebody to buy the treasuries, they need real dollars. These dollars can always be printed, but it's effect will be to drive up prices. If government is able to borrow more from real savings, it means other businesses will get less of that pool of savings. I don't care how convoluted the logic goes, you just can't create something for nothing. When a failing institution or business, whether it is a bank or some other business, get a hand out from the government, it always has to take it away from somebody else.

http://mises.org/story/3151

[Laissez Faire]

"Most dangerous words in English language: I am from the government, I am here to help" - Ronald Reagan