LIBOR is used to price about 150 trillion in securities, including, among other things, variable rate mortgages in the US and credit card debt in the UK. So movements in LIBOR matter a lot. And at this point those movements may well be fictional.

LIBOR’s not fictional to the people who are required to pay much higher interest rates. It’s what happened after the savings and loan crisis. Banks gave depositors almost no interest and charged borrowers 5 to 10 percent more than they paid depositors. Depositors got less than the inflation rate and banks got a good deal more. I don’t think it will work this time since borrowers are tapped out and the economy is not strong enough to keep them floating.

With the economy melting down everyone (including me) is trying to self-administer a crash course in macroeconomics. There’s too much noise at the moment though – too many terms, too many voices. I think the best first step would be to exclude those who have been consistently wrong (and where possible *coughPaulsoncough* get rid of them entirely) and start valuing the opinions of those who have a track record of being right. This is like the Iraq war – the same people who fucked up initially are putting themselves forward, and being accepted as, leaders for the cleanup. Appropriate penalties for failure would be wonderfully clarifying. And you don’t need to know Libor from Crestor to implement it.

What do you think? I think we’re getting over our head if we try to figure out exactly what they’re doing. Let’s just not let them do anything because they can’t be trusted and don’t know what they’re doing. Let’s insist on new people to lead – people with a track record of being right.

I also think it’s hard to overstate the “cash is king” thing right now.

To that point, I encountered a site, and for me, new and unsettling information about Obama.
In brief summation: Obama’s national campaign chair, Penny Pritzker, is one of the original developers of the sub-prime loan, through here ownership of a bank in Illinois. Eventually the bank went belly-up, taken over by the FDIC. She came out unscathed, and is now, with her family, a mult-billionaire (+10Billion-not chicken feed). And she is the money maker for the Obama campaign.

The point the blogger makes is that Obama, now is locked in to continuing the same basic fiscal policy (with some minor cosmetic changes), that will make the rich richer, because of his association with Pritzker.

the site is http://www.bestcyrano.org/THOMASPAINE/?p=1089

Food for thought Angry B

Nonetheless they can lend for more, or they can keep cash equivalents on hand. And both, right now, are worth more than lending short. Cash is king right now, because you can snap up distressed companies and assets cheap. People were paying 8 cents for Lehman stuff. A lot of it was worth more than that, even I believe that and I’m a pessimist. A killing was made. The returns on that will be far more that 2 or 3 or 4%.

Right now you can lend long for more than inflation, or you can keep cash on hand for use buying stuff at cents on a dollar. Why should you lend short? And 3 months isn’t that short, really: if you’re not certain how bad things are going to go, you’ll probably just put it in treasuries, which can be used as cash, and sit on it.

But there is very strong resistance to lending below inflation. Brockway used to call it the “Bankers classic COLA” and bankers hate not getting their COLA, which is why traditionally Fed rates were alway set at inflation+ profit, so banks would always be profitable and want to lend.

For example, say that x=3% and y=2%. Say the bank loans $1000 for a year at x+y%, i.e., 5%, in a time of 10% inflation. They receive $1050 at the end of the year, give $30 to the fed and/or depositors, and pocket $20, which now has the buying power of what was $18 at the time of the loan. My point is that they did not lose money.

The LIBOR is made up of rates submitted by 16 large banks every day, of what they say could borrow money at if they wanted to. In the past the variance between the rates they submitted was rarely more than a couple basis points, these days it’s often more than a 100 basis points. The explanation? In the past they were actually borrowing and the rate was about the same for each of them. Now they aren’t borrowing from each other and are just making the numbers up, or if you wish, estimating them.

IIUC, this is exactly the point that ubetcaiam was making in the first paragraph of this diary: http://oxdown.firedoglake.com/diary/655

IMHO, the problem is not so much that banks aren’t loaning to each other, but that in the aggregate they aren’t lending to the non-banks, who are in need of cash to pay their workers and vendors. They aren’t borrowing from each other because the credit isn’t flowing to their customers.

I don’t buy the notion that it’s because of inflation; they make their money on the difference between interest rates. Inflation might diminish their profits but not make them disappear. Banks need to loan all the money they can get their hands on at whatever rate will make them a profit, the higher the better so long as the profit is positive.