Wednesday, October 15, 2008

A Dark Morning (War of the Worlds Edition)

(Felix Salmon) A hardy perennial in sci-fi movies is the scene where people start firing ever-larger weapons at some alien object, only to see it wobble a little instead of getting obliterated as expected. I'm beginning to see the TED spread (432bp today) as one of those alien objects. Which is not to say people aren't hopeful:

The London interbank offered rate, or Libor, that banks charge each other for three-month dollar loans dropped for a third day, its longest sequence of declines in seven weeks, according to the British Bankers' Association. It slid 9 basis points to 4.55 percent today...

"Government participation in the banks along with the huge liquidity operation is flooding the financial system, which is having the desired effect on Libor," said David Keeble, head of fixed-income strategy in London at Calyon.

Er, no: "the desired effect on Libor" is not a 9bp drop from 4.64% to 4.55%. The desired effect on Libor is to get it down to below 2% -- something which would normally be entirely reasonable when the Fed funds rate is 1.5%.

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