One possible explanation for "credit freeze"

[philly_bob]

So banks won't lend to each other or to consumers or to small businesses.

There is a traditional Free Market answer to such a lack of supply: raise the price that borrowers pay lenders, i.e., increase interest rates.

For instance, I don't "lend" money to my bank (through a Certificate of Deposit) unless the interest rates is attractive, say 5% or more. Offer me 3% and I ain't taking out a CD.

But the Fed is holding down interest rates for its own purposes (i.e., fight inflation, help Republicans).

So if the Fed just raised interest rates, the banks would start lending again.

Am I wrong?

Another corollary: bottled-up inflation ahead.

[nebenaube]

1. sort of..

But then the rate of foreclosures will sky-rocket... Better to reduce credit card interest and have jobs programs.

[tama]

2. You are wrong

Money=debt. There is a debt bubble, humongous and mind bogging. It has bursted despite Greenspan etc. multiple bubblery, which only made the problem worse. Debt bubble deflating, there is less and less money. Money dollar per debt dollar ratio getting worse and worse and then none.

In essence: since money is debt, you never had any money. Just make believe and horrible debt to past and future generations.

[stillcool]

3. Someone once told me that every time..

a bank makes a loan they create money. Then they sell the loan, and really have money. Sounds like a sweet deal.

[tama]

4. Here

http://www.youtube.com/watch?v=vVkFb26u9g8

[stillcool]

9. I wanted to thank you for that..

quite the eye-opener. Sometimes it really sucks when things make sense.

[AdHocSolver]

8. Wrong! Money is NOT debt! Debt is a promise to pay money at a future time.

If you have cash, you are not holding debt. The notion that money is "debt" only applies in a very broad way to Federal Reserve Notes in which the Federal Reserve promises to "pay" the holder of the notes an equivalent value of "something" based on the face value of any notes.

Credit card purchases are debt. If you buy something with cash, there is no debt as far as you are concerned. The "debt" belongs to the Federal Reserve. The "debt" is owed by the Federal Reserve. This is why the bailouts won't work. They merely substitute one debt for another.

Moreover, the Fed's increasing the money supply, which amounts to increasing the amount of their debt to the public, merely compounds the problem of their being able to pay it off.

The same argument applies to the Treasury bailouts as well. Increasing the Federal deficit, that is, increasing Federal debt, makes it less likely that the debt can be repaid.

The bailouts by either of these entities is a fraud. It cannot fix the credit problem. It is fraud, equivalent to throwing gasoline on a fire to put it out. The purpose of the "bailouts" is to shore up the "value" of these worthless assets until such time as the insiders can sell their stocks and derivatives and make a profit before the whole house of cards collapses. This is Enron all over again.

Economically speaking, the money SUPPLY is composed of cash, checks, money orders, debit cards, PLUS credit cards with balances, and various types of loans. To say that money IS debt is simplistic and misleading.

These bailouts amount to adding a fresh new stock of chickens to the henhouse to enable the foxes to better guard them.

[nadinbrzezinski]

5. You are wrong, the problem is the interbank lending rate

that is the money banks lend to banks. It's gotten high... higher than the feds by the way.. way higher... so banks don't trust each other and to a point will not lend to you at an advertised rate

It is called the LIBOR... and it has gotten ugly

[philly_bob]

6. So a graph comparing the "spread" or "variance" between Fed rate & LIBOR

would show that the spread is much, much wider today than it has been in calmer economic times.

Fed rate very low, LIBOR very high.

Is that it, NB?

(Unfortunately I don't have capacity to make such a graph.)

[nadinbrzezinski]

7. Yes, the rate for Libor right now is 5.2% for Euro

4.4 for the dollar

And the fed is down to the 2s

I am going from memory

It is a similar problem to what happened during the Depression and for similar reasons

Here on the depression

http://en.wikipedia.org/wiki/Great_Depression

A good intro

[Hannah Bell]

10. and both ae set by a small group of bankers, not dropped from heaven on stone t ablets.

Man-made, not a force of nature.

[anigbrowl]

13. Well, it's two economists actually

who work at the British Bankers Association. Every day they call up 7 large banks (the 7 largest, if I remember right) and ask them what interest rate they would charge for lending money overnight, for a month, for 3 months etc. Then they ignore the lowest and highest rates (which could represent exceptional conditions) and calculate the average of the remaining 5.

There are a bunch of other similar numbers, like MIBOR (for Indian banks, M = Mumbai), EURIBOR (Various non-London Euro banks) and so on. Then there's LIBID, which is the amount those same banks are willing to borrow at and similar variations. Recall that banks constantly borrow from each other all the time not least to accomodate the fact that customers are depositing checks written on each other, and if they didn't borrow money at interest they'd have to send armored cars back and forth all day with cash to t-bills to settle up their accounts continually.

[Hannah Bell]

15. no, the banksters determine the rates. the "economists" just average them.

+, it's not seven banks.

[anigbrowl]

16. Yeah, it's 16 banks, not 7. My bad.

You seem to have missed the text of my post wherein I said that what the economists do is average the rates from the member banks.

[Hannah Bell]

17. it's more than 16 they "consult" with.

but the most relevant info is: the biggest international banks set LIBOR.

it doesn't come down on tablets from god; it's a product of big bankers.

[anigbrowl]

18. For the dollar, it's 16.

Banking panel members by currency http://www.bba.org.uk/bba/jsp/polopoly.jsp?d=145&a=9743&artpage=all
Background FAQ http://www.bba.org.uk/bba/jsp/polopoly.jsp?d=225&a=1416&artpage=all

[Hannah Bell]

20. if there a super-special libor for "the dollar"? didn't know that (lol).

first it's 7, then it's 16, then it's 16 for "the dollar".

why don't you just say, "thanks, i wasn't quite up to speed on that" instead of pretending you're schooling ME?

my original point: a small number of large international banks - & bankers - set LIBOR. for their own reasons, in their own interest. if they want to freeze credit, it will be frozen, never mind the consequences to others.

they can't then turn around & say "omg, credit's frozen, we need money from government/taxpayers to unfreeze it!"

if they actually wanted to unfreeze credit, they could work something out between themselves.

[anigbrowl]

22. What's your problem? I misremembered the # first time, then corrected it.

I even said I was going from memory when I mentioned 7, and said it was my bad when I replied with the correct figure. As for your original point, it seems to amount to nothing more than 'OMG its a conspiracy'.

[Hannah Bell]

24. i don't have a problem. just noting how you keep trying to school me, though

the error was yours.

& how you avoid the main point.

[anigbrowl]

25. Believe it or not, it's not all about you

I was trying to supplement the information you gave with some more information so everyone in the thread could read it. I have no interest in schooling you, whereas you seem eager to school me. I have never disputed that LIBOR is man-made, I was just pointing out that it's not *directly* set by the banks.

You are the only person going about this 'tablets from heaven' stuff, not me.

[anigbrowl]

14. Close enough. Here's a graph...

This is derived from LIBOR - it's the spread between the Federal funds rate and non-financial commercial paper; in other words, this is the cost for business to borrow short-term money, minus the banking sector. The reason for that is that the banking sector does nothing but move money around so including it paints a somewhat misleading picture as the money involved isn't directly related to money spent on payroll, supplies, transport etc. etc.

<-- what we want is for the red line to drop back to 100 or less. This going to take a month, if not longer.

You can see this at http://www.federalreserve.gov/releases/cp/ which gives adaily snapshot of the credit markets.

[Hannah Bell]

23. now you drag in ted spread to muddy the waters further. libor, fed rate, ted -

all set by a small number of big bankers.

[anigbrowl]

26. Supplying information is muddying the waters?!

What is your problem? He asked a question, I answered it and told him where he could get more detailed information. Jeez.

[Hannah Bell]

27. nah, my error, thought it was a reply to me.

see, some people can just say, "oops, my error."

[anigbrowl]

28. See #16

[Robert Oak]

11. leveraging

they are too over leveraged and stuck with CDSes (credit default swaps) plus don't believe others will pay them back due to the lack of transparency of these bad debts and concern over pure insolvency.

[anigbrowl]

12. You're wrong, but in a smart way

In fact, what you describe is already what's happening - the interest rate for borrowing is going up.

Basically, there are two rates that matter a lot in finance: that set by the Fed is the amount paid on treasury notes, and then there's LIBOR (London InterBank Overnight Rate) which is the rate at which banks lend to each other. Now, in addition to lending, there is also the sale of debt: companies issue commercial paper, states and municipalities issue bond notes.

The way this works is that Entity X announces it wants some short term money, and announces the sale of notes which mature in (say) 30 days and accumulate interest at (say) 5%. A ratings agency which keeps track of the Entity's financial health gives these bonds a rating, and then they are sold at auction - usually a telephone auction. Money market fund managers and others call the issuing entity at a certain time, bid on the notes, hand over cash, and 30 days later (or whatever the terms are) they get their money back plus interest. That's the 'grease on the wheels' of the business world.

So when you hear about companies or states being unable to get loans, they're not usually going to a bank and saying 'please give us a loan', they're writing up bonds and offering them for sale, but nobody is buying. Because of the legalities of how such bonds are put together, you can't just sit through the auction and say 'hmm, nobody's buying - tell you what guys, we'll jack the interest from 5 to 6%, any bids now?'.

Instead they have to go back to square one, draw up a new bond, calculate a new interest rate they can afford, and get a new rating for that bond. Same way that if you go to Horrible Bank and they offer a CD at 3% (which you don't want), the manager in the bank can't just say 'well, tell you what, I'll jack it up to 5%'; rather, the bank has to come up with a new CD product first.

Now, if you consider the two interest rates as mentioned above, the difference between those is called a 'spread' - specifically, the 'TED spread' (TED = Treasuries/EuroDollars, a mix of the Fed and Euro Central bank rates). The size of the spread represents how much riskier it is to lend to a bank or company vs. buying treasury notes from one of the large central banks operated by a nation. Lately this spread has been going to record levels, meaning that loaning money privately is considered far riskier than usual. For example, one European bank last week was borrowing overnight at a rate of 11%.

In VERY simplistic terms this is like other banks saying to that bank 'we think there's an 10% chance of you going bust between now and tomorrow'; the high interest rate is a reflection of how much (or how little) the entity selling their debt is trusted by the market. Please note, that is NOT a technical definition, but the subconscious emotion beneath it.

The goal of the trasury bailout which passed Congress last week is to buy enough of those assets from banks for people to trust the banks' balance sheets again, and lower the spread between private lending and the return on treasury notes - but it's going to take at least a few weeks for that to go into effect. If the spread has fallen by half at the end of this month, it'll be a major successs - the cost of lending will still be too high, but it won't be astronomically high.

[phantom power]

19. I wonder if they can start purchasing any sooner...

try to get the ball rolling. Looks like its going to be a long couple of weeks...

[anigbrowl]

21. I imagine they're working round the clock on it

But they have to do some sort of minimal due diligence. I'm guessing first purchase announced sometime this week.