Despite Bailout, Credit Markets Tight

The TED spread is used to determine how tight the credit markets are. The signal it is sending right now is that credit markets became tighter even after the $700 billion financial bailout bill was signed into law.

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ROBERT SIEGEL, host:

For most investors, the massive drops in the stock market have been horrifying. But for Henry Paulson and Ben Bernanke, it's probably not the Dow or the S&P that keep them awake at night. Bankers, economists, and traders are all keeping their eyes on a little known indicator to figure out exactly how tight credit is. Joining us to talk about that is NPR's Adam Davidson. And, Adam, we'll get to the indicator in a moment, but first, how tight is credit today?

ADAM DAVIDSON: Well, it's pretty tight. I mean, it is still, for the last two weeks, it's remained at historic highs or historic lows, as the case may be. Basically, that means money is not flowing at all - very much at all between banks and from banks to businesses in the short-term markets. The scary indicator that we'll talk about in a minute has doubled, which is scary.

SIEGEL: That's right. This is a vocabulary lesson. The indicator that tells you that is called the TED spread. Very few people used to pay attention to it, but tell us what it is.

DAVIDSON: Yeah. I mean, for most of our life, it's been absolutely easy to ignore. TED, its T stands for T-bills or short-term Treasury bills, Treasury bonds, three-month Treasury bonds. The ED, the ED, stands for Euro Dollar, which is just a fancy way of saying dollars traded internationally between banks. Basically, the idea here - you don't have to worry about all that stuff - the idea here is, if you have some money that you are willing to lend to someone, and you want to get some interest rate back, the absolute safest place you could possibly put it is to lend it to the U.S. government.

SIEGEL: Hmm.

DAVIDSON: But large banks, historically, should be almost as safe. I mean, these, until the last few weeks, were seen as almost as safe as the U.S. government. So, the TED spread is the distance in interest rate between the U.S., what the U.S. government will give you to borrow your money and what those banks would give you to borrow your money. Those should be really close, and most of our life, they have been really close, but they've been separating because people don't trust banks. And that's an indicator that people won't lend to banks. Banks won't lend to other banks, and that's really the fluidity when you hear this phrase liquidity. That's what it means. That's the money flowing through the system.

SIEGEL: So, we're talking about the gap between the rates for T-bills and the LIBOR rate.

DAVIDSON: Right. That's the, basically, the official rate internationally for lending between banks in dollars.

SIEGEL: How far apart are the T-bill and the LIBOR today?

DAVIDSON: Well, the number today?

SIEGEL: Hmm.

DAVIDSON: Well, right now it's 3.56. That might mean nothing to you, but it, for most of this decade, has been at 0.19, 0.2, extremely low. Meaning, you're almost getting exactly the same rate from the U.S. government as you are from a bank. When this crisis hit in August and then for - certainly at the end of 2007, it hurdled up to two. Meaning, you're getting two percent more interest from banks. That's another way of saying banks are not able to borrow very easily. It is now almost at four, so these numbers might mean nothing to you, but let me put it this way. In this crisis, it has risen 2,000 percent.

SIEGEL: And that is a measure. The higher it is, the less money is flowing, the tighter credit is.

DAVIDSON: And the more anxious people are.

SIEGEL: It's a measure of anxiety.

DAVIDSON: It is seen as the measure of global anxiety. And what that's telling us is, we have a very globally anxious world right now.

SIEGEL: And we can find the Dow Jones or the S&P 500, they are just about any place. Where do we find the TED spread if we want to look for it?

DAVIDSON: The only way I found it is you Google it, and the second link is to a Bloomberg site. That's the best way to do it that I found.

SIEGEL: OK. We'll all go Google. Thanks a lot, Adam.

DAVIDSON: Thank you.

SIEGEL: It's NPR economics correspondent Adam Davidson. There's lots more about various aspects of the financial news on our Planet Money podcast and blog. And you can find all that at npr.org/money.

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Correction Oct. 8, 2008

In some versions of this interview, we incorrectly described LIBOR as the "London Interbank Overnight Rate." LIBOR actually stands for the London Interbank Offered Rate.

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