Be Relieved! The Credit Crisis Seems To Be Abating!

The most terrifying immediate possibility associated with the financial crisis was that credit markets would suddenly seize up in a way that prevented businesses and local governments from getting short-term loans. This would make it impossible for large numbers of people to get paid. But now the credit markets are easing up and it looks like that crisis is passing.

This chart shows the TED spread over the last three months. The TED spread is the interest rate on interbank loans minus the interest rate on 3-month Treasury bills. When it's high, that means that people are so worried about credit risk that banks are getting nervous about lending to each other and demanding high interest rates. The all-time high was October 10, when it hit 4.65. That had a bunch of economists freaking out. (Historically, it's been around 0.30.) Thanks largely to government intervention, it's now declining. Let's hope it keeps going down.

This doesn't mean that people's massive stock market losses are about to come back, or that we're going to avoid a recession. What it does mean is that a whole bunch of people's jobs aren't going to suddenly vanish tomorrow because somebody couldn't get a loan.

Comments

[oddjob]

What it does mean is that a whole bunch of people's jobs aren't going to suddenly vanish tomorrow because somebody couldn't get a loan.

Good. That means we can go ahead and have a deep recession of historic proportions without having to worry overmuch that it would turn into something far worse.......

:-(

[weboy]

No... people's jobs are going to vanish tomorrow because companies are swimming in red ink as sales drop and the economy tanks.

Yes, improving the credit markets was a key piece of "saving" the economy... but that leaves a home mortgage crisis, a general recession, and far less spending by consumers. And that's before we wade into the fact that even if they can loan money to each other, the main story with banks over the coming months will be failures and consolidations. Also... is it any help that the interest on 3 month T-Bills is something like .1% just now? That would mean banks are giving each other money practically for free.... which also hardly seems like an improvement.