Editore"s Note
Tilting at Windmills

Email Newsletter icon, E-mail Newsletter icon, Email List icon, E-mail List icon Sign up for Free News & Updates

July 15, 2008
By: Kevin Drum

ECONOMIC UPDATE....Retail sales were up a minuscule 0.1% in June. Yippee. But inflation is still a concern, so Bernanke says not to expect any help on his end:

In prepared testimony at the Senate Banking Committee, Mr. Bernanke avoided the word "recession" in characterizing the current economy, noting instead that consumer spending and exports were keeping growth "at a sluggish pace" while the housing sector "continues to weaken."

....He said that while the risks to the overall economy were still "skewed to the downside," inflation "seems likely to move temporarily higher in the near term." The Fed, Mr. Bernanke said, needed to guard against higher prices spreading throughout the economy.

Meanwhile, credit crisis #4 is brewing on the horizon. Batten the hatches, folks.

UPDATE: That "credit crisis #4" comment was overly cryptic. Sorry. Paul Krugman briefly explains the "TED spread" here:

The TED spread is the difference between the interest rate banks charge each other on 3-month loans (3-month LIBOR) and the interest rate on 3-month U.S. Treasury bills. It's a measure of financial jitters. If banks believe that their peers are solid, they should be willing to lend each other money on almost the same terms as money lent to Uncle Sam. When they start demanding a big interest rate premium, that's a sign of fear.

The TED spread has spiked three times in the past year, indicating three separate credit crises (all of them related, obviously, but still separate). Today Krugman notes that the TED spread is again starting to spike in the wake of the IndyMac/Freddie/Fannie failures, which may mean that yet another credit crisis is brewing.

Kevin Drum 12:04 PM Permalink | Trackbacks | Comments (18)

Bookmark and Share
 
Comments

The signifigance of Mr. Krugman's graph is not exactly obvious.

Posted by: Quaker in a Basement on July 15, 2008 at 12:12 PM | PERMALINK

Okay, I have no idea what any of that means. More text, please.

Posted by: junebug on July 15, 2008 at 12:17 PM | PERMALINK

... clarifying, *any of that* referring to the Krugman bidness.

Posted by: junebug on July 15, 2008 at 12:20 PM | PERMALINK

dittos to all of the above. WTF?

Posted by: BW on July 15, 2008 at 12:22 PM | PERMALINK

Meanwhile, credit crisis #4 is brewing on the horizon. Batten the hatches, folks.

Spreading rumors now, Kevin...

Posted by: pol on July 15, 2008 at 12:32 PM | PERMALINK

A lot of our problems can be traced to "Funny Money Phil" Gramm. The one who hasn't sprnt one day of his adult life without a government paycheck. The one who thinks everything will be fine if we just stop whining. The one who is John McCain's economics advisor.

Posted by: on July 15, 2008 at 12:42 PM | PERMALINK

ITEOTWAWKI

Posted by: Waldo on July 15, 2008 at 12:43 PM | PERMALINK

A run on the banks may prevent a bombing run on Iran. The US will not withdraw its troops from Iraq, so withdraw deposits from US banks.

Posted by: Brojo on July 15, 2008 at 12:46 PM | PERMALINK

Your update is helpful. I'll simply repeat the introductory paragraphs from that story in The Telegraph last month:

The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks.

"A very nasty period is soon to be upon us - be prepared," said Bob Janjuah, the bank's credit strategist.

A report by the bank's research team warns that the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as "all the chickens come home to roost" from the excesses of the global boom, with contagion spreading across Europe and emerging markets.

Such a slide on world bourses would amount to one of the worst bear markets over the last century.

Posted by: junebug on July 15, 2008 at 12:51 PM | PERMALINK

Today Krugman notes that the TED spread is again starting to spike in the wake of the IndyMac/Freddie/Fannie failures, which may mean that yet another credit crisis is brewing. —Kevin Drum

"Another credit crisis"? This is all part of the same mess. It will be 18-24 months until we're out of this. Like Clinton, Obama gets to inherit a Republican recession.

Posted by: Jeff II on July 15, 2008 at 1:04 PM | PERMALINK

Quit whining, this is the "Bush Boom", all we need are a few more tax cuts....

Posted by: Stephen on July 15, 2008 at 1:18 PM | PERMALINK

How much of that 0.1% increase is from the stimulus checks?

Posted by: Jet on July 15, 2008 at 1:43 PM | PERMALINK

Certainly the current problems in the mortgage markets have something to do with the increased TED spread, and yes, the TED spread is an important indicator. But the fact that the British Banker's Association recently warned member banks that they must HONESTLY report their interbank rates (previously they had been reporting lower than actual rates) has made historical comparisons suspect at best.

Posted by: Dave Brown on July 15, 2008 at 1:48 PM | PERMALINK

"Such a slide on world bourses would amount to one of the worst bear markets over the last century."

Posted by: junebug on July 15, 2008 at 12:51 PM
----------------

And it will create a fantastic buying opportunity for those who know to keep some cash handy for when they come across a great sale.

For anybody who still believes the garbage coming out of the Bush p.r. machine it means selling off everything only to discover you've just tossed a ton of money for no good reason.

Net effect is to shift ginormous financial wealth to the anti-Bush crowd to go along with the political power shift which is occurring simultaneously.

Posted by: MarkH on July 15, 2008 at 5:56 PM | PERMALINK

Krugman is right-it is the IndyMac bank run that's the real worry. When everyday, ordinary people start to get a bit excited... It is really incredible how many people aren't aware that the FDIC doesn't insure 100% of an account over $100K. When the ones that haven't figured that out, start figuring out over the next few days, that should make for a lot of transactions at a LOT of other banks, too. I think that's what has the FDIC and others a little concerned.

Posted by: Doc at the Radar Station on July 15, 2008 at 9:45 PM | PERMALINK

a short TED Spread spread

"Normal" = 0.1 to 0.5

"Uh-Oh" = 0.51 to 0.75

"Something's Coming" = 0.76 to 1.25

"Batten down the hatches" = 1.26 to 1.75

"Mother of Mercy, is this the end of Ricco" = 1.76 to 2.25

And so forth

Look at the far left on the linked chart - prior to August, 2007, notice the line is steady under 0.5 - first peak is August "beginning of subprime crisis" meltdown - second peak is (roughly) Countrywide - third peak is Bear Sterns, with added mini-peak for digestion - Krugman is pointing out we are now moving towards next peak, which people have been predicting since Bear Sterns - and people say there are more peaks in the future, as the waves of mortgage resets come in like one tsunami after another through 2010-11

Posted by: fatbear on July 15, 2008 at 10:39 PM | PERMALINK

fatbear - that was completely awesome.

Again, this is a very odd time in institutional finance. Banks aren't supposed to lie about their LIBOR rates, but they've been doing so for months now.

I don't know what the best analogy would be for what's happening in the institutional space. it's like you've been playing poker with your buddies for years and years. No one minds when someone throws an IOU in the pot -- everyone trusts everyone. Now you're supposedly playing the same game, but damn, you suddenly realize you don't actually trust anyone else! Can they actually pay their debts?! You look down at your pile of chips and you see a bunch of IOUs. they're eyeing you, too. You can see they don't trust you, either. But no one's calling bullshit on the IOUs. The game just continues, more and more nervously.

In the retail space, yeah, I can't imagine WTF some people are going to do. The graphs show that plenty of people piled more than $100k into the same bank. (I think it's 2/3 of the large dollar savers.) It's a pretty simple rule at the FDIC, but few considered the risk while chasing teaser rates. So you can "protect" yourself from a potential bank default only by taking the huge penalty for early withdrawal -- ouch!

Posted by: meum pactum dictum on July 16, 2008 at 12:10 AM | PERMALINK
A run on the banks may prevent a bombing run on Iran.

Yeah, because foreign wars are never used as a distraction from domestic hardship. Ok, well, hardly ever. Okay, its about the most common reason people launch non-defensive wars, but still...

Posted by: cmdicely on July 16, 2008 at 6:44 PM | PERMALINK




 

 

Read Jonathan Rowe remembrance and articles
Email Newsletter icon, E-mail Newsletter icon, Email List icon, E-mail List icon Sign up for Free News & Updates

Advertise in WM



buy from Amazon and
support the Monthly