Remember the days of talking about the TED spread and interbank lending? So over. And apparently Sheila Bair said “the liquidity crisis is over for good.”
One way to look at the decline in interbank lending rates is that interbank lending has become safe again – because governments around the world have made it so abundantly clear that they will not let major banks default on their liabilities, no matter what happens. So what we have is interbank lending rates that are artificially suppressed by implicit government support.
In any case, I guess now we’ll find out if Tim Geithner was right that this is just a liquidity crisis, not a solvency crisis.
By James Kwak