The answers to the above, in the view of two economists, are: 'yes' and 'yes.'
Short-term interests have fallen considerably in the past four months, with the London rate for three-month loans in dollars (LIBOR) declining to 1.16% Thursday from 4.82% earlier last fall, primarily on the strength of more than $8.4 trillion in liquidity-oriented interventions by the U.S. Federal Reserve and other major central banks.
Still, credit conditions remain constrained, with credit availability no where near where it should be for healthy commercial activity, so says economist Richard Felson. "Credit conditions have improved since the fall crisis that nearly froze the global credit market, but you'd still categorize the credit markets as stressed, with a lack of bank-to-bank confidence. Credit markets are still not liquid enough to support an economic recovery," Felson said. "Central banks will have to do more to normalize credit conditions, primarily through purchases of assets."
The LIBOR is particularly important because it determines rates for $360 trillion of financial products worldwide, from home loans to derivatives.
More government loan guarantees?
Another telling indicator of credit market conditions is the TED spread, which measures the difference between what banks and the U.S. Treasury pay to borrow dollars for three months. It rose five basis points to 107 basis points Thursday, down from 387 basis points in October 2008, Bloomberg News reported. However, the TED spread was 87 basis points before the Lehman Brothers bankruptcy, and the current rate is still 96 basis points above the 11-basis-point, five-year average.
Economist David H. Wang said short of nationalization of 'too big to fail' banks / financial institutions, governments around the world may have to guarantee payments to creditors (lenders) to keep money flowing.
"Lenders are becoming concerned that if, for example, they do business with Bank 'B' or lend to Customer 'C' that they may not be paid back in full, in the event of government takeover," Wang said. "And this is contributing to the reluctance to lend, and indeed even a reluctance to invest in banks."
Further, in addition to guaranteeing certain payments, major governments may have to buy the stock of some ailing banks, Wang said. "It is an option which should be considered in conjunction with loan guarantees. It would further strengthen bank balance sheets."
Bank Sector / Economic Analysis: As noted, although credit market conditions have improved, the progress is about half-way complete - - not enough to facilitate a robust economic expansion. Hence, more capital liquidity measures are needed, including: toxic asset purchases, backstopping of debt, stock purchases, and other balance-sheet enhancing tactics.
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Reader Comments (Page 1 of 1)
1-22-2009 @ 2:41PM
BHarrison said...
If we have to rely on the government for business and personal loans, then what is the basis for paying exorbitant salaries and compensations to the CEOs, the CFOs, and other upper management personnel who are doing nothing more than "nursing" these FIs and corporations solely for the purpose of having a "vehicle" for THEM to be paid their exorbitant salaries and compensations, right? Otherwise, what purpose and functionality (or "value") is there in the performance of these management personnel?
They are merely dragging out the demise of these FIs and corporations as they draw these exorbitant compensations, and to the detriment of the stock holders and the other employees. This is all a total SHAM!
These FRAUDS must STOP! These CEOs and managment are merely "gaming the systems" to maximize whatever compensations they can get from the corporations without regard to "productivity" or profits for stock holders. . . . and the corporate crimes continue on . . . and Congress does nothing to redress these matters.
1-22-2009 @ 4:08PM
Iridium said...
::
Also, if the banks refuse to lend after getting a gift of hundreds of billions from every taxpayer, why can't we get a loan for 1%.
Years of consumer rape are rewarded with boatloads of cash with no strings attached.
Bank of America raised my interest rate to 29%. Good thing I don't have a balance on the card. I have a 770 credit score and have never missed a payment.
I am really contemplating maxing out my $120k worth of credit with credit line access checks, taking all the money, and moving to Switzerland. Screw the crooks.
In fact that is what we should all do. Max out all of our credit lines and refuse to pay. Send a message to the banks and our government that if a bank can go billions in debt and get a windfall payment then so should the rest of us.
1-22-2009 @ 7:10PM
william lindblad said...
Both previous comments are interesting and full of merit. It would seem that the credit market cannot get out of greed mode. Now that the government and taxpayer have all but guaranteed the survival of the major lenders, they drag their feet getting back into the banking business. In their opinion, all ills are that of the consumer. So, they punish the consumer. This is totally illogical, but represents the thinking of the CEO's in charge.
If I were an elected representative I would have a policy of no public backing until the institution changed leadership. These people are a product of greed and are a detriment to any economic recovery. This should be government policy and the removal should not include any perks, incentives, or golden parachutes. It is the only way to get undivided attention short of jail time.
However, don't hold your breath waiting. Our government does not have the backbone, nor can our representatives cancel their previous dealings. Too many have been in bed with those that both created and are perpetuating the problem.
The latest solution looks to be a new version of the RTC. When all fails, put those responsible in charge. Give them a pile of money and tell them to dispose of the liabilities. This is easy. The taxpayer foots the bill and the CEO's get the sales commissions. They don't do this directly as they are still smart enough to use dummy companies and intermediairy's, but it happens just the same.
Yes, the credit markets and the economy are going to remain bad - for quite some time.