Two of my favorite media outlets (NPR and Slate) have been talking about a number I’d never heard of before: the TED spread. It’s the difference between interest rates on inter-bank loans and treasury bills. It can be used to gauge the health of credit markets, and right now it looks really bad.
An increasing TED spread indicates increasing risk aversion in the market. Investors are favoring [safer] government debt over corporate debt. Banks are afraid to lend to each other because the borrower could fail, or they might need cash to survive their own crisis.
The TED spread is normally around 0.5 percent. Over the past year, it’s bounced around between 1 and 2 percent. Economists started to freak out when it topped 3 percent last month. On Friday, it was as high as 4.65 percent.
The credit market has seized up. The plunging Dow is reflecting that liquidity is critical to business. Credit is the lifeblood of our economy. Until credit markets are righted, things will continue to get worse. Perhaps much worse.
Keep an eye on the TED spread.
Tags: Credit Crisis, Economy, TED Spread
