Ed from Boston writes:
I was wondering if you could discuss how a person, someone you might call "Joe Sixpack," could follow the credit markets. I do not think the Dow is a good daily, weekly or monthly barometer of this financial crisis. From listening to your podcasts and my reading, the downturn in the credit market is the real danger to the economy, but I don't have an easy way of following it.
One place to start is with LIBOR, the London Interbank Offered Rate.
LIBOR is the interest rate that the most stable borrowers (read: very steady banks) can expect to pay. The British Bankers' Association sets it in London each morning. LIBOR typically rests a few hundredths of a point apart from the federal funds rate, which is what banks with deposits at the Federal Reserve charge each other for borrowing money overnight.
Except for when it turns poisonous, which has lately been the case. Banks have been unwilling to lend to each other, because they can't tell whether the borrower will be in business when the loan comes due. In recent weeks LIBOR has been as high as 6.88 percent, against federal funds target rate of 2 percent. (It's called a "target" rate because the Fed is also subject to market conditions; for now, the Fed aims to lend to banks at 2 percent. When the Fed makes a move on that, the news usually winds up in big headlines.)
If, like Ed, you want want to take the pulse of the credit crisis, you could start by comparing the steady federal funds target rate with the ever-shifting one for LIBOR. Check out Bankrate's LIBOR chart, which follows loans of one month, three months, six months and one year.