That makes no sense at all. It’s telling you that the US Treasury is more risky than swap counterparties, which is impossible.

There’s always an inner dynamic when market outcomes appear superficially irrational. Those inner dynamics are often hard to discern.

But it’s not necessarily unusual for overnight rates (which follow a different market dynamic) to be higher than term rates.

For example, last night the Fed Funds rate in the US was about 2.24%. Fed funds is an interbank overnight interest rate. But the rates for all current US Treasury securities 3 years and shorter are below 2%! And there’s nothing frozen about either the Fed funds market or the front end of the Treasury yield curve.

Of course you can have an inverted yield curve for lots of reasons such as expectations in rate cuts and/or recession, the imbalance in demand of short/long term borrowing needs etc. I understand that. In treasury securies’ case, this may mean the enormous money pumped into the markets have flooded the short term end of the yield curve etc. Plus, the Fed funds are much more restrictive, banks do not go to the central banks to borrow money for everything.

I’m still very puzzled by the enormous spread between overnight LIBOR and 1 & 3 months LIBOR.

Yeah, those quotes are dollar LIBOR. The sterling & euro LIBORS are also very high.

I assume those quotes you gave are for dollar LIBOR (there are also versions for sterling, euro and gold-forward).

The term-financing market is indeed frozen, and LIBOR rates are definitely fictitious at best, at this point. The overnight markets, particularly for collateralized repo, are reasonably functional.

But it’s not necessarily unusual for overnight rates (which follow a different market dynamic) to be higher than term rates.

For example, last night the Fed Funds rate in the US was about 2.24%. Fed funds is an interbank overnight interest rate. But the rates for all current US Treasury securities 3 years and shorter are below 2%! And there’s nothing frozen about either the Fed funds market or the front end of the Treasury yield curve.

Can you explain why the overnight LIBOR is higher than 1-month & 3-month LIBOR. This does not make any sense at all under normal circumstances. Does this mean the 1-month & 3-month markets are virtually non-exsistent and you can’t really borrow money on those quoted rates? or does it mean market indicate that in 1-month & 3-month, the rates will eventually come down?

I’m confused on this.

http://www.cnbc.com/id/26905693

LIBOR OverNight5.09381.1563
LIBOR 1 Month4.51250.3725
LIBOR 3 Month4.750.43

Was that a pig joke? :}

Disorganization, confusion, and ignorance among his minions all work in our favor, either short-term right now, or, if the American populace gets really stupid and elects him, long-term for a 2010/2012 comeback.

And everyone from President Bush to Secretary Paulson to the leadership in Congress did an abysmal job of explaining to the public what the TARP legislation was actually all about. They allowed everyone to immediately form the impression that $700 billion was being transferred from the pockets of poor and middle-class people right into the Swiss bank accounts of a raft of rich white men on Wall Street.

Unfortunately this is also par for the course with this President. His most memorable sound-bite on the crisis so far has been his glib and tone-deaf summation: “Wall Street got drunk. It got drunk and now it’s got a hangover.”

Then he tried to pivot on that poorly-considered comment and convince the United States and the world that it was facing a crisis of grave seriousness demanding immediate, concerted, far-reaching and global action.

I’ve waited eight years for the President to finally kick his habit of making mincemeat of himself because he cannot match his words to the seriousness of the tasks placed before him by the events of history. I’ve finally come to realize that it just isn’t going to happen.

Obama’s campaign schedule is fuller, more hectic and seemingly improvisational. The Obama aides who deal with the national reporters on the campaign plane are often overwhelmed, overworked and un-informed about where, when, why or how the candidate is moving about.

…

The national headquarters in Chicago airily dismisses complaints from journalists wondering why a schedule cannot be printed up or at least e-mailed in time to make coverage plans. Nor is there much sympathy for those of us who report for a newscast that airs in the early evening hours.

…

The McCain campaign plane is better than Obama’s, which is cramped, uncomfortable and smells terrible most of the time. Somehow the McCain folks manage to keep their charter clean, even where the press is seated.

That’s the guy who the Democrats want running the show.

As you say, however, the unintended consequences are unknown and certain to be deleterious, at least to some extent.

I fully appreciate the risk to freedom. I’m not frightened about it, as long as the people currently running the show stay where they are. I would seriously worry about it, depending on who the next President brings in.

A counterexample to your point that government power once attained is never relinquished, would be the RTC. When it finished its work, it wound itself down and disappeared. There’s no fundamental reason that can’t happen again.

Another counterexample is how Sweden handled their banking crisis in 1994. They nationalized almost every one of the country’s banks by buying preferred stock from them with public money. About two years later, almost all of the nationalized banks had been successfully re-privatized.

The essence of the problem we have to solve today is insolvency. This was also a critical problem in 1931 and 1932. Unlike then, we now have the equipment to add capital to the financial system quickly. That’s what has to happen.

About the borrowing power of the US: it continues unabated. I think your fears are unfounded. And in this time of crisis, the rest of the world understands that they need us to pull through, and they’re looking to us for leadership. The power to borrow will be there.

Of course, if we get a Democratic President who starts spending money like a drunken sailor on national health care and an alternative-fuels Apollo program, all bets are off.

Francis, I thank you for your time and insight.

I realize things aren’t that bad yet and hopefully they won’t get there. But it is my belief that we are deepening the inevitable market adjustment by trying to prevent an economic slowdown. The shift away from the malinvestments has to occur but by distorting the market forces we are creating even more problems.

I think this whole problem is an excellent example of the law of unintended consequences as just about every action the government or Fed makes leads to some outcome that leads to malinvestment requiring further intervention. I believe it was Hayek who said there can’t be an omniscient planner to know all market conditions at any one time so the only way to let the market work is by getting out of the way.

Finally, I believe that many of the prescriptions you have explained and tacitly supported (as a great many other Republicans as well) are extremely dangerous to liberty. I know the intentions are not such but history has shown time and again that powers granted to central governments are rarely, if ever, returned to the people.

I’m sure we will find people who look back at the measures taken and wonder how we could have possibly gotten to the point we are today. I wonder after the US nationalizes the banking industry over the next few weeks what the next step is? Will it be price and wage controls?

I also wonder if at some point the world says “no thanks” to buying our debt which we obviously will never be able to pay back? If that happens, then it’s game over USA and we would be bankrupt and suddenly very poor.