for those who think there's no problem: understanding the ted spread

please read up on the ted spread. this is a simple metric to assess the perceived risk of lending to banks.

http://en.wikipedia.org/wiki/TED_spread

it's the difference between 3-month libor and 3-month treasuries. treasuries are considered "risk-free", so the difference is the risk of lending to banks instead of the government.

well, the ted spread has been less than 0.5% for quite a long time, but recently has been quite a lot higher.

http://www.bloomberg.com/apps/quote?ticker=.TEDSP%3AIND

at the moment it has shot up to 3.18%. this is absolutely huge. that's saying investors demand an extra 3.18% return to lend to a commercial bank instead of lending to the government.

that shows an extreme reluctance to lend even for supposedly safe institution like a commercial bank.



how imagine what it's like if you're a retailer or a construction company or an airliner or a toy manufacturer looking to borrow money FROM a bank to open a new plant. if commercial banks are already perceived as rather risky, what do you think the perception of risk will be for your business? risk on top of risk. sky-high interest rates if you can even get a loan, which increasingly is happening only for rock-solid companies.

REAL COMPANIES OUT THERE ARE ALREADY BEING STRANGLED.

COMPANIES WITH CASH ARE RESERVING THEIR CASH FOR VULTURE TAKEOVERS.

we are going to see a lot of consolidation on the way down. when the economy eventually returns, it will be with fewer players, less competition, and MORE "too-big-to-fail" companies.

what's going on is NOT PRETTY. be for the bailout or against it, but please don't deny what's going on.

if there is no bailout

Its not only wallstreet that will suffer

It won't make one damn bit of difference, but it will delay universal health care and decay our educational institutions. It's one last SCAM before the bottom drops out.

because universal health care is nowhere on the horizon

ditto decay of educational institutions

Thanks for this!

I think that a lot of people recognize that their is a problem. But people seem unsure of a couple of issues:

1. How this affects them (and I think that your post does a good job of describing this)

2. How this could be addressed without a bailout. This is where I think people's lack of knowledge regarding the economy really has them confused (myself, included FWIW).

It seems obvious to me that this problem is not going to correct itself. And the only other proposal I've heard is that House Republican proposal where it seems companies would buy insurance ad hoc for their failed investments (?) and that just makes no sense to me. Plus they insisted that further deregulation and capital gains tax cuts were required for this to work, so that plan gets a big thumbs down from me.

So I guess that leaves me supporting the bailout plan that's on the table.

i have no idea if the bailout will work, if it will be enough.

personally, i think they waited too damn long. something needed to be done a year ago, and all they did was eventually cut rates, trying to solve the wrong problem. rate cuts are PART of the solution but certainly not the entire solution.

i think the bailout if far from ideal, but it seems to be the only game in town and beats nothing. i really, really wish something had been proposed at least 6 months ago. some of us saw this coming a mile away.

Part of the supposed diligence that went with the creation of things like mortgage-backed securities and all the derivatives that grew form there was getting credit insurance to help make a somewhat risky security more 'investment grade' so that it could be purchased by highy risk averse entities like mutual funds. The insurance companies that underwrote that business then tried to diversify the risk yet further with credit risk swaps. It would have all worked except that the amount or risk in the system kept growing until there's no place for any more of it to go. When failures started to occur the whole strucutre started to come down, and it became clear it would land on lots of folks who had little of no part in creating the problem.

Why the R's in Congress think some kind of private insurance will work now is a mystery to me, except that it may be a sop to help get their votes on the bill.

The anger and distrust from the public (and the voters!) is justified and understandable, but letting us have another depression is NOT the answer. Anyone who things so should go find somebody wno lived through the last one and talk to them for awhile. Letting the guilty 'get away with it' is distasteful, but better than the alternative.

and they can go to their electorate and claim they stood up to mr. toxic shrub.

I know mine is. So when the reset date comes (next year, we just passed one for this year), that's more than an extra 2.50% pushing the nominal rate from 5.5% to over 8% (and in my case adding nearly $1000/per month to my mortgage payment).

The last thing our economy needs is higher mortgage rates and more defaults.

most adjustible mortgages have reset caps, so increases are limited to, say, 2% per year and 6% over the life of the deal.


in any event, that's another argument for a rate cut, hopefully it keeps the mortgage resets to a minimum....