Editore"s Note
Tilting at Windmills

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April 17, 2008
By: Kevin Drum

THE TED SPREAD....The TED spread is the difference between the interest rate on 3-month treasury bills (safe as houses, um, well, really safe, anyway) and the rate banks charge each other for 3-month loans (the LIBOR rate). I'd never heard of the TED spread until a couple of months ago, but apparently it's a pretty good indication of financial jitters. When the financial markets are calm and happy and everyone is paying their bills, the spread is small. Banks lend to each other for only a small premium above what Uncle Sam charges. When fear takes over (will Bear Stearns really be able to pay back that loan?) banks raise their interest rate and the TED spread increases.

Anyhoo, Brad DeLong calls the TED spread "the consensus indicator of the depth of the current financial crunch," so I thought I'd toss it up for everyone to see. The chart below shows the TED spread for the past three years: smooth sailing until August 2007 when the subprime crisis hit, another jump in December, and then a third in March. So far, nothing the Fed has done has kept the financial markets calm for long, and after the last intervention the spread didn't even manage to recover as well as it had the during the first two crises. It went down a measly 74 basis points and then started rising again.

What happens next? Who knows? I just thought I'd share this as something to watch if you want to take the current temperature of the financial markets. At the moment, the answer seems to be "not so great, but it could be worse."

(And, in fact, it might be worse. The Wall Street Journal reported the other day on suspicions that banks are lying about their interbank lending rates, making LIBOR seem smaller than it really is. If this is true, then the TED spread is actually larger than it seems. Yuck.)

Kevin Drum 11:23 AM Permalink | Trackbacks | Comments (26)

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Comments

And the issue we are expected to debate is?

Posted by: Ron Byers on April 17, 2008 at 12:14 PM | PERMALINK

Oh, so it doesn't have anything to do with Ted Haggard...

Posted by: Swan on April 17, 2008 at 12:16 PM | PERMALINK

Don’t get too hung up on technical gobbledygook, Kevin. Things are WAY-Y-Y worse economically in America than this nonsense suggests. Click here for details.

Posted by: The Conservative Deflator on April 17, 2008 at 12:22 PM | PERMALINK

Treasury Bills are about the only thing I still trust. I no longer trust TNotes or TBonds because I think we're a McCain presidency away from national collapse. Will it result in a disintegration of the United States? You know, it's a very distant possibility.

Posted by: MNPundit on April 17, 2008 at 12:23 PM | PERMALINK

It's all about kicking it down the road until it can really be blamed on the Democrats.

Posted by: Neal on April 17, 2008 at 12:50 PM | PERMALINK

Interrupting my brief lunch break to ask Orwell to kindly stuff it.

Weenie, have you tried the TED Spread on whole weat toast? I recommend the strawberry.

Posted by: thersites on April 17, 2008 at 1:04 PM | PERMALINK

or even whole WHEAT toast...

Posted by: thersites on April 17, 2008 at 1:09 PM | PERMALINK

Yikes! I hadn't seen this before. Not good.

Posted by: fostert on April 17, 2008 at 1:13 PM | PERMALINK

By the way, anyone know what 'TED' stands for? I'm assuming it's an acronym.

Posted by: fostert on April 17, 2008 at 1:18 PM | PERMALINK

I thought we Americans agreed not to talk about politics, the economy, Iraq War, health care, Social Security, housing crisis, religion, free trade, or any other issue. The Onion said so.

Let's get back to talking about a sentence fragment Barack Obama or Hillary Clinton might have said last week in the middle of an hour-long speech, and parse that statement six ways from Sunday.

Posted by: anonymous on April 17, 2008 at 1:24 PM | PERMALINK

...anyone know what 'TED' stands for?

Interesting little description here:

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

Posted by: JM on April 17, 2008 at 1:24 PM | PERMALINK

I'm thinking, the more frequently I see the term TED spread the worse off we are - this isn't going to be good.

Posted by: Chowderhead on April 17, 2008 at 1:45 PM | PERMALINK

Not to beat a dead horse, but how about a chart of the TED spread compared to the spread over Treasuries on Iraqi bonds? It just doesn't get any better than that!

Posted by: y81 on April 17, 2008 at 1:45 PM | PERMALINK

This, '{safe as houses, um, well, really safe, anyway)' made me think of this political cartoon.
Fireman Ben To The Rescue

Posted by: Jet on April 17, 2008 at 2:00 PM | PERMALINK

Hey Orwell, Liddy Bourne said its okay to cling to your religions and weapons...cause climate taxes would cause civil war...seems Karl has a right wing almost Marxian moment on his hands.

Posted by: Jet on April 17, 2008 at 2:05 PM | PERMALINK

It really is a good graph of the psychology of the market. The first big spike took a lot of people by surprise, you got some quick intervention, stocks recovered, the 10mg of Financial Valium™ appeared to take hold fairly well. The second wider peak was the stuff that happened back during the MLK holiday in January. That was a broader sense of building doom-it had a killer anticipatory component. But, we got a second much larger dose of Financial Valium™ delivered intravenously (a slow steady push), and things recovered once again, but more slowly. Then the sharks smelled blood again and you had the Bear Stearns episode. Now it is like the movie Airplane and you aren't sure who has had fish.

Posted by: Doc at the Radar Station on April 17, 2008 at 2:13 PM | PERMALINK

Remember that T Bills are 100% safe since they are issued by the entity that prints the money that pays the T Bills.

It would be interesting to see how much more the US Treasury would have to pay if it issued debt in Euros or in Yen. Then there would be an actual risk since the US can't print those currencies to pay foreign currency debts

Posted by: neil wilson on April 17, 2008 at 2:35 PM | PERMALINK

Give credit where credit is due. Paul Krugman has been blogging about this for some time.

Posted by: Polacca on April 17, 2008 at 2:42 PM | PERMALINK

Yes, but applying my Magic Petraeus-izer to it I predict that it will smooth out for the foreseeable future.....

Posted by: Stefan on April 17, 2008 at 2:48 PM | PERMALINK

Krugman chipped in another 2 cents on the subject , just now.


Posted by: charlie don't surf on April 17, 2008 at 4:11 PM | PERMALINK

Kevin,

Will you pay me interest if I borrow money from you?

Posted by: Yancey Ward on April 17, 2008 at 4:43 PM | PERMALINK

Banks possibly lying about the rate they're charging one another? I'm shocked, shocked, I tell you.

Posted by: Lynn Lightfoot on April 17, 2008 at 8:23 PM | PERMALINK

In case you believe the media crap that everything will be fine in a couple of quarters, read the following:

From Hussman Funds
(quote)

Clearly, as we enter April 2008, we appear to be quite early in the mortgage
crisis, with only about a quarter of the cumulative resets having occurred.
That places us near the start of the third inning, where we can expect each
of the nine "innings" to be about three months in duration. Unfortunately,
the next three innings (quarters) are when the heavy hitters on the opposing
team will come up to the plate, as the cumulative amount of resets will
surge. With that surge, loan losses and foreclosures will also predictably
spike higher.

(end quote)

Posted by: psychohistorian on April 17, 2008 at 10:58 PM | PERMALINK

"Banks lend to each other for only a small premium above what Uncle Sam charges."

Should that be "what Uncle Sam pays"?

Posted by: on April 17, 2008 at 11:53 PM | PERMALINK

how much more the US Treasury would have to pay if it issued debt in Euros or in Yen.

Not that it would happen, but an interesting thought experiment.
When the time comes,whatever notes are sold will have interest rates reflecting the real cost of holding $s. If those oil dollars turn into euros or yen we'll see what it will cost in GDP terms to service the new and refinanced debt.

Posted by: TJM on April 18, 2008 at 12:03 AM | PERMALINK

"Remember that T Bills are 100% safe since they are issued by the entity that prints the money that pays the T Bills."

This is hilarious, though I know what the author means, the wording is hilarious, and rings a little warning too.

Posted by: Matt on April 18, 2008 at 3:36 AM | PERMALINK




 

 

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