Off the Charts
Commentators have compared the current upheaval in credit markets to the crisis that took place a decade ago, when hedge fund Long-Term Capital Management collapsed after numerous multi-billion-dollar leveraged bets all went wrong at the same time.
Yet based on the spread between three-month U.S. dollar LIBOR, the rate at which banks offer to lend unsecured funds to each other, and U.S. Treasury bills of the same maturity, conditions are more akin to the chaos that developed around the time of the 1987 stock market crash.
More ominous, perhaps, is the fact that banks have much less in the way of cheap and relatively immobile customer deposits backing their outstanding loans than in the past. That means they are more dependant than ever on other banks and the financial markets to meet their funding needs.
With the "TED spread" exploding, all those big-swinging bankers probably wish they had spent a bit more time looking after those lowly depositors.
I believe Michael Panzer has hit a bullseye.
When the financial spiral accelerates no amount of manipulation by the Fed will make any differance. The big guys and gals are running scared. Delaying the increase rates on mortgages will be just that- a delay of the inevitable financial fiasco.
Hey did we forget the price of oil? Just you wait and see. What to do? That is the real question. Mattresses anyone?
Posted by: Leon W. Fainstadt | December 02, 2007 at 12:39 AM
Or buy "the old relic" insurance. All that floating paper mess is being devalued left and right. And on its way to its ultimate value.
Posted by: MPawlowski | December 02, 2007 at 10:53 PM
The second chart shows something we should have seen coming ever since the savings rate in the United States went to zero. The chances for improvement are slim what with interest rates and inflation guaranteeing negative returns for most people. The chart is a strong statement for the idea that Americans are not as stupid as many would like to believe.
There is chatter that a recession would result, in part, with Americans increasing their savings. They won't if their efforts are sure to be fruitless. Just like many victims of Japan's postal system savings accounts Americans will take the risks involved with alternatives.
It will be entirely fitting if it turns out that the little folks held one of the Big Keys after all. Catastrophic, but fitting with most of recorded history.
There is no way on earth that a climate favorable to saving will reemerge until the kind of soul-searing lessons taught in epochal events like the Great Depression are learned by an entirely new and equally unprepared generation.
Posted by: Snappy Tom | December 03, 2007 at 12:17 PM
Mr. Panzner, I think the TED spread is only at a record high since 1987 if you look at weekly closes. The daily high from 8/20/07 was 237.5, almost 40bps higher from current levels (and almost 10bps higher than the 1987 peak, incidentally). It's a technicality, but worth noting.
Posted by: Michael W | December 04, 2007 at 08:17 AM
Under a Fiat Banknote currency scheme, such as the Fedback, Savings and Savings Rate is meaningless.
What counts is investment in new plant and equipment that generates future goods and future wages paid to workers.
Why are Savings and Savings Rate meaningless? Due to the accretion of new cash (notes and coins) into circulation, any existing cash held loses Buying Power.
Only Working Cash -- cash generating net cash flow -- has value.
Posted by: Pier Johnson | December 04, 2007 at 04:01 PM
I find it remarkable that bonds are still being bought with a negative rate of return. What does that say?
Posted by: NewstraderFX | December 04, 2007 at 09:39 PM
Savings rate are low due to the fact that investments and money markets don't count in that figure. The shift toward a brokerage account that pays higher interest and investment in mutual funds/stocks makes the savings rate look smaller, as it should but lets account for why.
Posted by: BST | December 12, 2007 at 01:58 PM