Sunday, September 28, 2008

700 Billion Dollar Bailout and The TED Spread

A metric known as “The TED Spread” may be what caused Secretary Paulson to panic and request a $700 Billion Bailout. If so, I wish he would have mentioned it when addressing the Senate Banking Committee.

Quoting Wikipedia:

“The TED spread is a measure of liquidity and shows the degree to which banks are willing to lend money to one another.”
Click here for a chart of “The TED Spread” and examine the 5 year history.

Click here (for a somewhat dated chart) and note that recent spreads in excess of 300 basis points are higher than levels reached during what some call “The Crash of 1987”.

But, click here for a chart of the S&P500 Index and put the so-called “Crash” of 1987 in perspective.

Personally, I am NOT convinced that “The TED Spread” justifies this $700 Billion Bailout. But, at LEAST we now have a somewhat legitimate metric to debate and discuss.

Speaking of which, quoting Felix Salmon:

“I think… so long as banks can borrow from the central bank overnight, the TED spread is largely unrelated to their real-world cost of capital. Which doesn't make me an optimist, by any means. But I do think that the TED spread can remain elevated for some time without the world coming to an end.”
Click here to read the primary post on this topic.

1 comment:

rvturnage said...

SBVOR, thanks for posting this info...I found your link from Carpe Diem and wanted to read up more on some of the "credit crunch" discussed in the media. I'd seen the Fed info posted at Carpe Diem, and couldn't figure out what the big deal was. The TED spread makes sense now...but like you say, it doesn't appear to be enough to justify a $900 Billion bail out...especially if other credit options are available.

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