Hear: What If We Let AIG Fail?

Calling on the main line in Fishersville, Virginia. BakerMonkey/Planet Money Flickr pool hide caption

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On today's Planet Money:

— Quick: If anyone had asked you six months which company Americans should save first in an economic crisis, would you have named AIG? As of today, taxpayers are on the hook for well over $100 billion to prop up the ailing insurer. But what if the U.S. hadn't decided to rescue AIG? Gregg Berman of Risk Metrics considers an alternate scenario.

— Our favorite economic indicator, the TED spread, has lately lost some of its luster. It's been stuck in the neighborhood of one, and yet the economic crisis drags on. Now we're starting a search for new indicators with one from currency strategist of Marc Chandler of Brown Brothers Harriman: margin debt at the New York Stock Exchange.

Bonus: A TED spread question, after the jump.

Alisa writes:

What's happening with the TED spread?

The TED spread ticked up over 1 today, for the first time since Jan. 12. A key measure of banks' axiety, the TED spread measures the difference between three-month Libor (the London Interbank Offered Rate) and the interest on a three-month T-bill.

In normal times — remember those? — the TED spread is well below one. At the height of the credit crisis, in October, it reached 4.6.

Why the new spike?

When the stock market goes down, as it did by almost 300 points todaytoday, bonds tend to go up. That's because investors head for the security of government bonds.

The government borrows money by selling U.S. Treasury bills (see "Government Debt for Beginners"). If the Treasury has more people clamoring to buy T-bills, it can sell them for higher prices — meaning taxpayers can borrow money at lower rates. It's a better deal for taxpayers, a worse one for investors.

As the interest on T-bills falls, it's less able to offset LIBOR — and so the TED spread is higher.

Bonus: Treasurys rise on AIG, economy

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