Several of our conservative friends have pointed to the very large reduction in the LIBOR interest rate between Tuesday and yesterday as evidence that the credit crisis is easing.
LIBOR is one those arcane things no one but geeks should need to understand. It’s a notional interest rate published at 11:00 AM GMT every day in London. It represents an adjusted average of the “offers” of sixteen large London banks for various kinds of short-term loans.
The offer is the rate at which the banks are willing to lend money. (The “bid” is the rate at which a borrower is willing to borrow. The market is generally somewhere in between the bid and the offer.)
LIBOR is extremely important for reasons I won’t get into now. But the dollar-denominated LIBOR rates (overnight and three-month) are key indicators to the health of the credit markets.
On Tuesday, LIBOR (which ought to be below 2.5%, given that the Fed funds target rate is 2%) shot up to nearly 7%, from about 3.8% on Monday.
And it fell just as precipitously on Wednesday, back below 4%.
This is being taken by some as a sign that credit markets are unfreezing. But that’s not the case.
Tuesday was the last day of the third quarter. Demand for short-term cash is always unusually high at quarter-end, because banks need to close their books and square their positions. The Tuesday rate was a technical distortion.
If you take Tuesday out, dollar LIBOR has been marching steadily upward all week. Overnight dollar LIBOR dropped sharply to about 2.85% this morning (if memory serves), but this reflects enormous injections of central-bank liquidity more than actual market conditions.
Three-month dollar LIBOR is still far above normal, and that’s a better indication of the sickness of credit markets, as it relates to actual business activity in the real economy. We have NOT yet had a break in the tension.
-Francis Cianfrocca
Moe Lane
Dan McLaughlin
Dan Spencer
Jeff Emanuel
Neil Stevens
Caleb Howe
Daniel Horowitz
4% Libor ain't cheap
streetwise (Diary) Thursday, October 2nd at 10:47AM EDT (link)Three month Libor, currently at 4.21%, was 2.81% at the beginning of September.
During better economic times, Libor is higher- it was over 5% a year ago. But that is normal. When the economy is humming, there’s a greater demand for money and increased concern about inflation, so rates rise.
When it is stalling (and some would say it is tanking), a sharp, sudden increase in short rates is signalling a big problem.
You can get more info re Libor from
the British Bankers Association
This is a really good clarification
Mark Reiboldt (Diary) Thursday, October 2nd at 10:48AM EDT (link)It is important for policymakers and the general public to keep in mind that since we’re facing a long-term crisis with volatility and uncertainty at max capacity, any attempt to show correlation between variables related to the credit markets will likely by highly heteroskedastic. Meaning, trying to use short-term volatility in LIBOR as an indication of the overlying crisis is not only presumptive but econometrically inefficient. Moreover, LIBOR doesn’t change based on exogenous factors alone like Congressional legislation, not even the bailout. There are too many other variables – this would by like trying to form conclusions about LIBOR and the credit markets in a vaccume. Either way, with uncertainty so high, any attempts at correlation would be highly suspect.
A year ago, Fed funds were at 5.25%
Francis Cianfrocca (Diary) Thursday, October 2nd at 11:00AM EDT (link)Now they’re at 2%. It was a different kind of aberration that LIBOR was below the funds rate. But you worry a lot less about that.
And ...
Mark Reiboldt (Diary) Thursday, October 2nd at 11:06AM EDT (link)what’s have the pertinent moving averages been? That’ll say more about the short-term volatility.
Heteroskedastic
Dave_in_Fla (Diary) Thursday, October 2nd at 11:14AM EDT (link)Wow, there is a new word for me. And that doesn’t happen often. :tips hat:
“If they were merely incompetent, then at least SOME of their actions would have been to the benefit of the country.” – Joe McCarthy
Moving averages are indicative of the broader economic trends, as
streetwise (Diary) Thursday, October 2nd at 11:17AM EDT (link)they smooth out the volatility.
But if you’re a corporate borrower, all that matters is the rates on the dates you borrow.
If you’re a bank, and borrow every day to fund yourself, the pain of a sudden rate rise is felt very quickly.
Has the conversation moved towards Barney Frank? :>) nt
streetwise (Diary) Thursday, October 2nd at 11:18AM EDT (link)BTW, whoever made RS faster today, Bless You! I support earmarks for your efforts!
streetwise (Diary) Thursday, October 2nd at 11:20AM EDT (link)To hell with principle!
actually
wsjreader (Diary) Thursday, October 2nd at 11:31AM EDT (link)actually you’re not exactly right. Most commercial loans to corporations are based on floating rates. The borrowing rates are generally based on LIBOR plus a markup. So it does matter to lots of companies.
True, if the rate resets on an index average.
streetwise (Diary) Thursday, October 2nd at 11:35AM EDT (link)But many corp loans reset every three or six months based on Libor two days before the reset loan.
so if you had a loan that reset on Aug 31, you got a much lower rate than what you got today, oct 2.
Not only did Frank's committee
Mark Reiboldt (Diary) Thursday, October 2nd at 12:28PM EDT (link)butcher the legislation, it also eliminated the controls for homoskedasticity
Why Not Temporarily Guarantee the Commerical Paper Market???
quill67 (Diary) Thursday, October 2nd at 12:31PM EDT (link)OK. I know this is a radical step, but at least for X number of days couldn’t we guarantee (Congress, maybe Fed with creativeness) any commercial paper written to businesses with a certain credit rating??
I know this might be overutilized but wouldn’t that be a good thing at this time?
I think I'm falling for you...lol
speciallist (Diary) Thursday, October 2nd at 12:34PM EDT (link)n/p
Why Are Markets Getting Socked Today?
Spartan4Life (Diary) Thursday, October 2nd at 12:43PM EDT (link)I know the data was ugly today but I thought part of the idea here was to supply some confidence to shaky markets. If that was really going to happen, I would have thought the vote in the Senate would have given the markets a little lift. I am getting concerned that this might not work.
Uncertainty
Mark Reiboldt (Diary) Thursday, October 2nd at 12:48PM EDT (link)is still through the roof, mainly with the focus on whether or not the House will pass the bailout. Also, while the big hit on Tues was in response to the failed vote, you’re now starting to see results of actual data (i.e., unemployment, GDP, etc) affecting the markets. And most importantly, there’s still a major insolvency problem and a perception of illiquidity in the credit markets (even though hundreds of billions of dollars have been pumped in the last few days). Simply put, the markets are unsure
Thanks Again Blackhead
Samsara (Diary) Thursday, October 2nd at 7:00PM EDT (link)I saw the article over at Human Events Magazine by Jed Babin. It is garbage. He takes one quote from the Financial Times, twists it out of context, and draws a conclusion totally at odds with the article and the facts. Poorly researched, pseudo-conservative drivel like this does not serve anyone’s interest.
Clear explanations of financial matters like Blackhead is providing are a breath of fresh air.