Global money markets seizing up

Posted Sep 30th 2008 8:44AM by Peter Cohan
Filed under: Financial Crisis

As the Dow fell Monday a record 778 points, or 7% -- a third as much as it fell in percentage terms in October 1987 -- the real action was in the money markets. That's because banks are not lending to each other any more and they are not lending to companies or people either. The only reason any credit is flowing is because central banks are pumping money into the system. For instance, the Fed added $630 billion yesterday to global money markets.

Cash is hard to come by. There are two measures that citizens can use to assess how well the money markets are working. Those are the TED spread, which measures the difference between three-month (London Interbank Offered Rate) Libor and the three-month Treasury rate, and the Libor-Overnight indexed swap (OIS) spread. The TED spread is near a record 3.38% (it was 1.1% a month ago). And the Libor-OIS spread is a record 2.46% (it was 0.08% a year ago).

What does this record level of distrust mean? It certainly reflects a loss of confidence in our leaders and our institutions. For banks it means they must either raise capital, merge with a stronger player, or shut down. For companies, it means hoarding cash and trying to get longer-term loans. And for consumers, it means cutting back on expenses and giving up on borrowing more money to cover the remaining ones.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

Tags: financial crisis, FinancialCrisis, inthenews, money markets, MoneyMarkets

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Reader Comments (Page 1 of 1)

10-01-2008 @ 10:05AM

Larry Hegel said...

I LIKE THIS PLAN BETTER.

Seems reasonable to me!
I'm against the $85,000,000,000.00 bailout of AIG.

Instead, I'm in favor of giving $85,000,000,000 to America in
a We Deserve It Dividend.

To make the math simple, let's assume there are 200,000,000
bonafide U.S. Citizens 18+.

Our population is about 301,000,000 +/- counting every man, woman
and child. So 200,000,000 might be a fair stab at adults 18 and up..

So divide 200 million adults 18+ into $85 billon that equals $425,000.00.

My plan is to give $425,0 00 to every person 18+ as a
We Deserve It Dividend.

Of course, it would NOT be tax free.
So let's assume a tax rate of 30%.

Every individual 18+ has to pay $127,500.00 in taxes.
That sends $25,500,000,000 right back to Uncle Sam.

But it means that every adult 18+ has $297,500.00 in their pocket.
A husband and wife has $595,000.00.

What would you do with $297,500.00 to $595,000.00 in your family?
Pay off your mortgage - housing crisis solved.
Repay college loans - what a great boost to new grads
Put away money for college - it'll be there
Save in a bank - create money to loan to entrepreneurs.
Buy a new car - create jobs
Invest in the market - capital drives growth
Pay for your parent's medical insurance - health care improves
Enable Deadbeat Dads to come clean or else

Remember this is for every adult U S Citizen 18+ including the folks
who lost their jobs at Lehman Brothers and every other compan y
that is cutting back. And of course, for those serving in our Armed Forces.

If we're going to re-distribute wealth let's really do it...instead of trickling out
a puny $1000.00 economic incentive that is being proposed by one of our candidates for President.

If we're going to do an $85 billion bailout, let's bail out every adult U S Citizen 18+!

As for AIG - liquidate it.
Sell off its parts.
Let American General go back to being American General.
Sell off the real estate.
Let the private sector bargain hunters cut it up and clean it up.

Here's my rationale. We deserve it and AIG doesn't.

Sure it's a crazy idea that can work.

But can you imagine the Coast-To-Coast Block Party!

How do you spell Economic Boom?

I trust my fellow adult Americans to know how to use the $85 Billion
We Deserve It Dividend more than the geniuses at AIG or in Washington DC .

And remember, The Family pla n only really costs $59.5 Billion because $25.5 Billion is returned instantly in taxes to Uncle Sam.

Ahhh...I feel so much better getting that off my chest.