The good news is that there has been no crash. Neither yesterday nor today did the market open already down 5% or much worse. That means activity is fairly orderly and true panic has not set in. That doesn't mean things are good or it won't happen another day, it just means the system continues to function for now. The LIBOR rate doubled overnight to over 6%. If you recall from Jon's post Watching The Credit Crisis, LIBOR is the rate at which banks lend to eachother. The soaring rate means that banks are hoarding cash and not supporting eachother, while those banks in need of funds are willing to pay nearly any price. The Fed injected $50 billion of liquidity overnight to help stabilize this activity, we will see to what effect. Speaking of the Fed, their regularly scheduled FOMC meeting is today and their statement (2:15pm ET) will be more interesting than the action. It may calm markets or upset them. We'll see.
EDIT 10:50am ET: It turns out the Fed injected another $20 billion last night in a second action, making the total $70 billion. It appears markets are waiting for news on AIG to decide what to do.
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Can you help me with a your statement "The Fed injected $50 billion of liquidity overnight to help stabilize this activity, we will see to what effect." Pardon my ignorance, but what does this mean that the Fed injected billions? Does this come from the Fed's petty cash fund or do they just print more money?
ReplyDeleteThank you for pointing that out. We forget that our lingo isn't always widely known. Readers should always challenge terminology.
ReplyDeleteThe Fed's petty cash fund typically just buys lunch and booze, probably more of the latter these days. Actually, what the Fed does to "inject liquidity" is LEND cash to banks in exchange for collateral. A bank would exchange treasury bills for cash to give it liquity and have to buy it back in a set period of time. Given this crisis, the Fed has relaxed its standards for collateral. Where it used to only accept U.S. Treasuries, it now accepts mortgages and other paper- probably even dry cleaning receipts these days.