Bloomberg.com reports the cost of borrowing in dollars in London for three months rose for a fourth day, making clear that banks haven’t started to lend after the U.S. Senate approved a $700 bln plan to rescue beleaguered financial institutions. The London interbank offered rate, or Libor, that banks charge each other for such loans climbed 6 basis points to 4.21% today, the highest since Jan. 11, the British Bankers’ Association said.
This is what I was afraid of – the money has dried up.
I don’t understand. Isn’t there a world of difference between high interest rates and “no money available”. To my simple mind, a 4.21% interest rate implies money is in fact available, at a 4.21% interest rate.
Just as gas at $4/gallon does not mean “no gas is available”.
Gas at 4/gallon does in fact mean “no gas is available” if the real cost to the retailer of gas is 6/gallon.
You can’t make folks give away their commodities for less than the true cost.
I believe the lack of gas in the South may be due to real shortages not “temporary shortages”. If you have price controls, then you will have shortages.
Money works the same way. If the interest rate is 4.21%, but should be 12%, but is held by government strong arming at 4.21, then no money will be available.
Price controls equals shortages.
Begin hoarding now. Fill your gas tanks when they drop to half. And make sure that your pantries are full.
Grow food. Plant vines. Have chickens.
I’m serious. (Clueless, but serious).
http://www.nytimes.com/2008/10/02/world/africa/02zimbabwe.html?_r=1&scp=2&sq=zimbabwe hyperinflation&st=cse&oref=slogin
This is an example of what happens when a nation tries to solve a problem of too much credit, by printing money (as the US is currently doing with its bail out).
Hopefully these are just passing libor pains.
So the banks don’t trust each other, but the taxpayers are supposed to trust the banks.
#2, these are the kinds of questions which are helpful. The question is what you mean by “high interest rates.”
Check out the following chart and table:
http://www.moneycafe.com/library/3mlibor.htm
You can see there that the problem is the three month libor is usually not a great deal more than the fed funds rate and other short term interest rate instruments. Since the fed funds rate is currently 2%, last month the three month libor at 2.81% is not that surprising. But look at what happened this month. On a percentage basis, it’s a huge month over month increase.
It means banks will hardly lend any other banks money, unless they pay a very high interest rate. So the arteries of the world monetary system are close to being clogged up.
Um. That graph and chart show me that from 1998 to 2000, and 2006 to 2007, LIBOR was higher than it is even now. So, in the last month it has jumped sharply, to maybe 70% of its 12-year high.
I am not yet motivated to look for an upper-story window to jump out of. Tell me another scary story.
#8 that’s because during those periods the other interest rates which were shorter term were much higher. The point is the spread.
Think of it in terms of housing right now. The banks say people can borrow. Some prospective home buyers are being offered 11% for 30 year (jumbo) loans. You could respond and say “yes but back in the late 70’s and early 80’s mortgages cost more than that.” That’s true, but what matters is the relative rate. Money is not easily available, and the little that is is VERY expensive. That is very bad news for all of us if it keeps up.
Kendall,
You wouldn’t trust a central committee to fix the price for bread. Your response would be that the market process is way too fluid and has far too many variables for a committee to calculate a rational price across the board. Money is a commodity like any other commodity–it is only unique in that it is a commodity in universal demand. So just as a central committee can’t fix the price of bread, so it can’t fix the price for money.
“So just as a central committee can’t fix the price of bread, so it can’t fix the price for money” —Byzantine [#10]
Kendall could respond that the spike in the price points to a supply problem. Banks, fearful of an incipient panic, are conserving their cash and becoming hesitant to lend to creditworthy borrowers.