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