People from all sides are coming out strongly in favor of finishing up the rescue package. Professor Stiglitz gives a great interview on CNBC about the frozen credit market (as well as an alternative rescue plan that may come back around in the future) and former GE CEO Jack Welch is on ABC. Neither is ecstatic with the details of the bailout but both also appreciate the need for urgent action. It's what we have for now and until Congress takes action, the credit market between banks is going to deteriorate even more. As John posted yesterday, the Libor rate is jumping as banks hunker down and hoard cash. For any stabilization, let alone recovery, money needs to move through the system.
Wishing this problem away or thinking that we can weather this is foolish. I can tell you from my own business experiences in recent months, this past quarter has been about as ugly as I can remember. Businesses both large and small are not spending and not hiring. Everyone is waiting to see what will happen and that means business is at a standstill until the direction is clear. Today, it's anyone's guess and those conditions are deadly to business activity.
From the Washington Post:
Yesterday, the annualized rate for those overnight loans spiked by more than four percentage points, to 6.9 percent, its highest level ever. Normally, Libor on dollar loans is not much higher than what it costs the U.S. government to borrow short-term money, which yesterday was nearly zero.
That tells experts that banks around the world are basically unwilling to lend to each other at any price. It means that cash is not flowing to places that need it. And, if sustained, would ultimately lead to higher borrowing costs for ordinary U.S. households and businesses.
"The interbank markets are a fundamental part of the plumbing of the financial world," Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, said in a speech yesterday. Many variable-rate mortgages, corporate loans, and other forms of debt adjust relative to Libor.
"This contraction in availability and rise of the cost of credit have worsened . . . for corporate and business borrowers," Lockhart said. "We've heard anecdotes confirming this from contacts throughout the Southeast. In short, Main Street is being affected."
