Liquidity Crisis? Check

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

9 thoughts on “Liquidity Crisis? Check

  1. The whisper last week on short term trading desks (yes, I work across from one) was that LIBOR was being manipulated. Banks arent borrowing as much in that market now, and no regulator is going to object to bogus self-reported rates in this environment. Amazingly, considering that such deceit was widely reported and investigated last year, this line of the day gets repeated everywhere without any skepticism. Citi issued 10-year paper today at nearly 8.8%, more than 500 over swaps, hardly a rate “artificially suppressed by implicit government support” (though this might have been a group not bank issued bond).

  2. Yet another poster who sounds like he is in the payroll of the TBTF club. Same $$$, different communication strategy: six words of BS instead of six paragraphs of straw men.

  3. i’m not sure why anyone would think this is just a liquidity crisis or just a solvency crisis. over the past year it has proven to be both. the stress tests have shown conclusively that major banks have issues with solvency — even using the government’s numbers many of them will require two years of positive earnings to be comfortably solvent even by the government’s not particularly stringent standard. furthermore citigroup and merrill (while it was being eaten by bofa) clearly required government guarantees that enhanced their solvency, not their liquidity.

    and the lack of lending from banks is certainly not a liquidity problem — they have plenty of deposits. it could be a solvency problem, or it could be a market calculation (ie lack of demand from qualified borrowers).

    i think that shelia bair is right, though, in saying that the _crisis_ of liquidity is over. there may be problems, but i doubt we will see large scale government intervention for liquidity reasons in this cycle.

  4. Liquidity crises beget insolvency crises. I’m not saying that by stopping one, you’re guaranteed to prevent the other, but by letting one go, you’re surely to cause the other. Stopping the liquidity crisis may not have gotten us out of this, but failing to stop it would definitely have made it worse.

    Just ask Lehman what happened when JPMorgan screwed them over by asking for $7billion in collateral with a day’s notice.

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