don't let the media fool you, if with all the liquidity, Banks are still not lending to each other, They must know something you DON'T. I'm not the conspiracy / paranoid type, but something is cooking. WHY with all the liquidity/ cuts/ guarantees / capital injections, Banks STILL won't lend to each other ?
Not sure if your questions are rhetorical, but I'll answer them as if they are not: 1. Banks taking some time to let the bailout details set in before becoming more willing to lend 2. Banks waiting for more detail about bailouts 3. Banks may prefer to reduce lending in order to improve strength of balance sheet Then some more scary explanations: 4. Despite equity injections, some companies may need more 5. Details are only known about equity injections for the bigger US companies - but what about the others? 6. Banks may think that other banks may need to make significant additional writedowns 7. Derivatives (especially CDS, and especially CDS for WM) exposures / risks remain. This raises the possibility of cascading defaults.
Good points. I'm still puzzled, Latency is not enough of a satisfactory explanation. Either that or everybody is just using the Fed as their bank now
Yes I forgot 8. Banks could rather lend to Federal Reserve and collect interest, rather than lend to a different counterparty with a higher risk of default
the problem isn't that bad. People can still get laosn. Small business loans thriving since if your business filas the bank will simply take away your house.
Mish wrote about the TED Spread this morning: http://globaleconomicanalysis.blogspot.com/2008/10/compelling-banks-to-lend-at-bazooka.html Snippet: The US is in a recession, consumers are cutting back discretionary spending, there is rampant overcapacity in every sector but energy, and there is no reason to go on a lending spree. Furthermore, there is no reason for any qualified buyer to want to borrow. Why would any responsible party want to expand in this environment? The only people who want to borrow significant sums of money now are the very people banks should not want to lend to. Thus the best thing banks can do with that money is sit on it. Yet the penalty for sitting on it is the difference between what the Fed will pay on bank reserves and the 5% interest banks have to pay at bazooka point for borrowing money they did not want in the first place. If banks do start lending like Paulson wants, defaults are guaranteed to increase dramatically.