LIBOR Tumbles, Credit Crisis
Easing?
By Michael Mohr, Nov. 7th, 2008
The London Interbank Offered Rate (LIBOR) has been steadily coming down over the last two weeks, taking a steep 10 basis points drop yesterday, signaling easing risk in the financial markets. As I discussed in, What is LIBOR anyway, and what scary message is it sending? this benchmark is an important metric to measure risk levels banks have for each other. Watching this metric ease is a signal of more liquid markets, and, more importantly, a return of confidence in the financial markets.
The declining LIBOR is a mark of success for central bankers. They have managed to stop a world-wide collapse of the financial markets. As LIBOR continued to creep up, and the disparity widened between LIBOR and the federal funds rate, policymakers started to lose their grip on controlling risk. Central Banks responded quickly with government guarantees between banks which seemed to have stemmed the rising fear and reversed the cash-hording trend.
I do not expect us to completely revert to normal lending practices in the short term. Underwriting remains tight and banks will continue to hold back as they start to reaffirm their footing and restore confidence. This is however some good news among some glum wage and employment reports released today. I hope this is a signal for the New Year, with LIBOR sinking and the federal government under new leadership (Obama has already made some good choices), the credit market will stabilize. Banks will start to lend to worthy businesses and the economy will start to recover… Then we can turn our eye to inflation!