Borrowing Gets A Little Easier

The "London Interbank Offered Rate," the interest rate at which banks can borrow funds from other banks, has dropped slightly for the third consecutive day. It's still not good compared to the days prior to the collapse of Lehman Brothers, but it suggests that more lending is going on.

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From NPR News, it's Day to Day. We're just checking up on the government's $250 billion bank rescue plan. The move was expected to ease tight credit markets and get banks to start lending money again. It's going to take some time to work. Marketplace's Janet Babin is here. Janet, is there some evidence that the banks are still reluctant to lend money and still charging a lot to do it? How do you see that?

JANET BABIN: Well, there is some evidence that the bank rescue plan is working, but it's working a bit slower I think than everyone had hoped. We measure this through this bank lending rate standard, it's called LIBOR. You've probably heard of it, Alex, but a refresher, LIBOR stands for the London Interbank Offered Rate, and it's just the average rate that major banks charge to lend money to each other. A lot of other lending rates are tied to this rate, including adjustable rate mortgages, student loans, that kind of thing.

Today, the three month dollar LIBOR rate is down 4.55 percent. Now, it's come down for three consecutive days. So, there's evidence that it's now costing less to borrow money, hence there's probably more lending going on. The big picture you have to remember that, say, before Lehman Brothers announced bankruptcy, that dollar LIBOR rate was down at 2.8 percent.

CHADWICK: Which was high then. They thought it was high then. Now, it's...

BABIN: Right.

CHADWICK: Now, it's really high. I really don't quite understand this. The governments in Europe and the U.S. government have come in and said, OK, we are going to guarantee your loans. We will back them up. Everything should be safe. Why isn't the rate falling faster after that?

BABIN: Well, Alex it is - the government is backing the debt, injecting monies through preferred stock purchases we heard about yesterday - the $250 billion. But if the banks use the money to make bad loans to people, they're still on the hook for those losses. I spoke to Josh Rosner at Graham Fisher about this. He says, the bank rescue plan will enhance solvency, but you can't force banks to lend that money out.

Mr. JOSH ROSNER (Managing Director, Graham Fisher): You can actually spend money to add liquidity to the system, but if users of that capital aren't confident that the economy is going to be brighter, they will continue to hoard that money.

BABIN: No matter what you do?

Mr. ROSNER: Really, no matter what you do. Confidence has to come before liquidity.

CHADWICK: Janet, how do we get the confidence?

BABIN: Yes. That is the question. And I put it to Joseph Mason at Louisiana State University. He says the Federal Deposit Insurance Corporation, the FDIC, has got to get rid of problem banks.

Dr. JOSEPH MASON (Department of Finance, Louisiana State University): Bank regulators do have inside information, so to speak, on the condition of banks. And now is the time when it's crucial for bank regulators to act upon that information, cull the weak banks out of the system.

BABIN: So, Mason says, if we get those shaky banks out of the system, the money will start flowing again. But also, the banks have got to clear the balance sheets of those bad loans. And as Fed Chairman Ben Bernanke said today, we need to have patience. I suppose it's just going to take a bit more time to work.

CHADWICK: All right. We'll keep watching that LIBOR rate. Thank you, Janet Babin of public radio's daily business show, Marketplace.

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