Checking in on the Ted Spread

Posted by Kendall Harmon

The difference between what banks and the Treasury pay to borrow money for three months looked like this today:

Even higher than last week, higher than 1987.

Filed under: * Economics, PoliticsEconomy

Posted September 29, 2008 at 8:22 pm [Printer Friendly] [Print w/ comments]

1. Pete Haynsworth wrote:

Wanna push that spread down?  Jim Cramer legitimately suggests bumping FDIC bank account insurance to $1 million.  All sorts of cash would flow into banks.

September 29, 9:41 pm | [comment link]
2. Karen B. wrote:

Morningstar has a helpful article which puts the TED spread situation into clear & plain English:

If you’re looking for a key indicator to shine light on the very root of our current problem, though, consider something called the TED spread, which represents the yield differential between 3-month T-bills and LIBOR, the London InterBank Offered Rate at which banks typically lend to each other. It’s a composite of data that banks offer each day estimating what it would cost them to borrow money from other institutions. Bloomberg reported today that this figure gapped out to 330 basis points—the most since that firm began tracking it in 1984.

Of course, that number is only meaningful as it pertains to lending of any magnitude that’s actually going on. Given the crisis of confidence that currently grips the market, scant little lending among banks is occurring. It’s difficult to know whether these numbers would even hold at their recorded levels if the banks could in fact manage to borrow from each other.

It’s unfortunately possible that even at these historic levels, the actual credit quality of submitting banks could be much worse than the numbers suggest. At this rate, the market would be justified in simply hoping that most of them will still be in business at the end of the week.

from here:

September 29, 11:33 pm | [comment link]
3. Irenaeus wrote:

“Jim Cramer legitimately suggests bumping FDIC bank account insurance to $1 million. All sorts of cash would flow into banks”

I’m skeptical of increasing FDIC insurance. What’s the evidence that banks are short of deposits? Where will skittish savers and investors put money if not in banks? Keeping money under mattresses is riskier and less remunerative.

Remember that you get $100,000 in insurance per depositor per bank in each category of legal ownership, with higher limits on retirement accounts. Americans with more than $100,000 to deposit can open accounts at additional banks. Are we really to believe that wealthy Americans are stashing cash under their mattresses or in their wine cellars?

Increasing the insurance limit would increase the cost of bank failures and further stretch the FDIC’s reserves. Congress did something similarly unwise in 1980, when it increased the insurance limit from $40,000 to $100,000 just as the thrift industry began to go under.

Once you increase the FDIC insurance limit, you’ll NEVER get it back down again.

September 30, 1:42 am | [comment link]
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