It looks like the Senate will be voting on a package soon. Just as a follow-up to my recent posts about the credit crisis, I don’t think most people understand that this isn’t about saving Wall Street. Instead, it is getting enough dollars in the system to free up lending to Main Street. How bad is it? From the Washington Post:
Yesterday, the annualized rate for those overnight loans spiked by more than four percentage points, to 6.9 percent, its highest level ever. Normally, Libor on dollar loans is not much higher than what it costs the U.S. government to borrow short-term money, which yesterday was nearly zero.
That tells experts that banks around the world are basically unwilling to lend to each other at any price. It means that cash is not flowing to places that need it. And, if sustained, would ultimately lead to higher borrowing costs for ordinary U.S. households and businesses.
“The interbank markets are a fundamental part of the plumbing of the financial world,” Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, said in a speech yesterday. Many variable-rate mortgages, corporate loans, and other forms of debt adjust relative to Libor.
I’m not smart enough to know whether or not this legislation is the right stuff for our economy. But this highlights the danger to our jobs from inaction.
{ 2 comments… read them below or add one }
Scot — I’m no financial wizard and neither is the average US Senator or Representative. The difference, they have the ability to write billion dollar checks - I don’t.
But, what I can say, is that if history tells us anything — acting when emotion is high will usually lead to a bad decision. Our economy has been propped up by easy credit for the last 8 to 10 years. We have overspent [that includes our Federal Government].
If you liken it to being overweight — our economy is the 600 lb man right now. I don’t know if ensuring he eats his fill of steaks is the answer. But then again, doing nothing is not the answer either. There is only one real answer for the 600 lb man - eat healthy and figure out a way to exercise. It’s fun and easy to get into debt - it’s not fun and easy to get out.
The Bailout plan is like “partying” all night, waking up the next morning and deciding that instead of the pain, you need more “hair of the dog that bit you”. Just because it will make the pain go away right now, does not mean the pain won’t return, or that you won’t have to deal with in the future.
Just my opinion. Thanks for the great articles!!
@Arnie - I agree. As in most things, this will take more than one thing to get solved. Scot’s rule of troubleshooting: the first thing you fix reveals the other two things causing the problem in the first place.
I think there is a liquidity crisis and it needs to be fixed. Then comes the hard work of diet and exercise. Do we have the discipline?