Sunday, October 12, 2008

How much extra do US banks want to part with their money?

At Odd Numbers, Zubin Jelveh points out:

"It was little a little more than a year ago when the [spread between what the banks could get overnight with the Fed and what they then charged each other] blew open from its typical spread of 8 to 10 basis points to 100 basis points:

It was quite a dramatic jump which indicated that interbank lending was drying up, prompting the Fed and other central banks to introduce measures like to bring down the spread.

And here is how that jump looks in comparison to everything that followed:

You'd almost think that Aug '07 to Sep '08 was peaceful."

UPDATE: Jelveh's graph is out of date already. On Friday the spread climbed to a new record of 3.64 and is set to climb higher still !

Michael Stutchbury explained the phenomina well on Saturday (below the fold)...

"THE world is flush with money. The Americans are working overtime printing it. The Chinese have piles of it. So have the Middle East petro-countries.

But the once-in-a-century financial crisis is getting even worse because the normal channels for connecting savers with borrowers have seized up.

The key global middle-men -- American and European banks -- have lost everyone's trust.

They can't get access to other people's money.

As international credit markets have seized up, there's been no global regulator to get them liquid again.

Individual governments have taken drastic steps, such as buying up hundreds of billions of dollars of bad bank loans or even partly nationalising their banking systems.

But, if anything, these unco-ordinated efforts have tended to make things worse.

Panicked financial markets are looking to this weekend's meeting of finance ministers and central bank governors in Washington to produce some big co-ordinated solution.

The markets need a guarantee that governments around the world will stand behind the banks.

Although Australia's banks have remained strong through the crisis, the Rudd Government may be forced to provide them with stronger backing.

A global deal could suddenly disadvantage them in comparison with weaker banks that have been backed by their own governments.

That would increase our banks' cost of raising funds on offshore capital markets."