nbruno322
11-08-2008, 12:33 PM
http://www.foxbusiness.com/story/markets/real-reason-libor-falling/
When LIBOR rose, everyone panicked -- so now that it’s fallen, one might think that’s a good sign.
It isn’t necessarily.
LIBOR is the London Interbank Offered Rate, a measure of the rate that banks assess other banks for loans. When Lehman Brothers filed for bankruptcy and banks stopped trusting each other enough to lend money, LIBOR spiked higher and was often cited as a measurement of how bad things were.
Three-month LIBOR was down to 2.3875% as of Thursday from a high of nearly 5% at the beginning of October, Banc of America Securities data showed. The analysis along with that mentioned that “improvements to credit markets continued.”
But Banc of America Securities’ Jeffrey Rosenberg pointed out in a research note that “the key reason for that improvement” was “nearly $1 trillion worth of support for the funding of the financial system.”
In other words, LIBOR is going down only because the Federal Reserve is flooding the system with money -- and it’s true around the world, too, as other central banks also prop up their financial systems and work to avoid a meltdown.
“If you look at what’s going on with the quantitative easing of the Fed, it’s boosting its balance sheet by hundreds of billions of dollars,” said David Ader, head of government bond strategy at RBS Greenwich Capital. “The Fed has flooded the system with so much liquidity, and that’s what LIBOR is reflecting. Banks are willing to trade with each other because the Fed has basically backed and guaranteed all these loans.”
“It certainly is a positive that LIBOR is coming down and commercial paper seems to be getting freed up, but still the fundamental problems for the economy remain,” agreed Maryann Hurley, vice president at D.A. Davidson.
When LIBOR rose, everyone panicked -- so now that it’s fallen, one might think that’s a good sign.
It isn’t necessarily.
LIBOR is the London Interbank Offered Rate, a measure of the rate that banks assess other banks for loans. When Lehman Brothers filed for bankruptcy and banks stopped trusting each other enough to lend money, LIBOR spiked higher and was often cited as a measurement of how bad things were.
Three-month LIBOR was down to 2.3875% as of Thursday from a high of nearly 5% at the beginning of October, Banc of America Securities data showed. The analysis along with that mentioned that “improvements to credit markets continued.”
But Banc of America Securities’ Jeffrey Rosenberg pointed out in a research note that “the key reason for that improvement” was “nearly $1 trillion worth of support for the funding of the financial system.”
In other words, LIBOR is going down only because the Federal Reserve is flooding the system with money -- and it’s true around the world, too, as other central banks also prop up their financial systems and work to avoid a meltdown.
“If you look at what’s going on with the quantitative easing of the Fed, it’s boosting its balance sheet by hundreds of billions of dollars,” said David Ader, head of government bond strategy at RBS Greenwich Capital. “The Fed has flooded the system with so much liquidity, and that’s what LIBOR is reflecting. Banks are willing to trade with each other because the Fed has basically backed and guaranteed all these loans.”
“It certainly is a positive that LIBOR is coming down and commercial paper seems to be getting freed up, but still the fundamental problems for the economy remain,” agreed Maryann Hurley, vice president at D.A. Davidson.