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Kai Ryssdal: President-elect Obama’s plans for a massive stimulus program gave the stock markets a boost today. It didn’t do much to unglue the credit markets, though. And let’s remember for a year or so we called this whole thing a credit crisis. And those markets are still stuck tight, according to the usual gauge people look at.
I’m talking about the LIBOR here. It’s used to be a pretty obscure financial benchmark that only mattered to bank bureaucrats buried deep in their balance sheets. But not any more, as Mitchell Hartman reports in today’s edition of the Marketplace Decoder.
Mitchell Hartman: LIBOR. It sounds like a heavy metal or a rare disease. And it has
sickened the financial markets lately. LIBOR stands for London Interbank Offered Rate. At precisely 11 a.m. Greenwich Mean Time every day, the British Bankers Association asks as many as 16 giant banks how much interest they’re charging each other to borrow money.
Andrew Hilton: It measures the willingness of one bank to lend to another bank, overnight or for three months or for six months.
Andrew Hilton directs the Centre for the Study of Financial Innovation in London.
Hilton: If the banks are lending to each other, then there’s trust in the system, and they’re prepared to lend to other people as well.
When banks stop trusting each other, they stop lending, and that causes the system to fail. LIBOR acts like a thermometer for a sick economy — the sicker the economy gets, the higher LIBOR goes.
Hilton says LIBOR’s down from its recent record, but it’s still worryingly high.
Hilton: There’s an absence of trust, because the banks themselves are best placed to know what kind of rubbish, what kind of toxic assets they’ve got on their own books, and to make the assumption that other banks are in much the same situation.
And why should the rest of us care about huge banks gouging each other? Brian Bethune’s an economist at IHS Global Insight. He says, banks pass those higher rates on to you and me.
Brian Bethune: There are a large number of business loans and consumer loans that are indexed to this LIBOR rate, because it’s such an important barometer of conditions in the interbank market.
In other words, as LIBOR rises, so does your mortgage and the credit line your boss uses to pay the bills.
Right now, Andrew Hilton says, LIBOR is see-sawing wildly up and down, and not many overnight loans are being made. That’s because of an almost total breakdown of trust between the banks. Hilton says banks are accusing each other of lying to the British Bankers Association about whether they can borrow in the interbank lending market at all, at any price.
So LIBOR, the most reliable benchmark we had to gauge the health of the global banking system has become completely unreliable.
I’m Mitchell Hartman for Marketplace.