Thursday, April 10, 2008

Not Over Yet by Paul Krugman (Princeton)

Gurk. The TED spread is up again. So is the LIBOR-OIS spread. (One is the spread between Libor and Treasuries, the other the spread between Libor and the futures price of the Fed funds rate; I tend to prefer TED spread, because fears of bank defaults should affect Fed funds as well as Libor; but I know that Fed officials prefer OIS. Anyway, both pointing in the same direction.) And the flight to safety is back, with the interest rate on one-month Treasuries — which should be about the same as Fed funds — back down to 1%.

All of this involves fear of defaults by banks — despite what look from here (central New Jersey) like utterly clear signals from the Fed that bank debts will be socialized if necessary. I’m puzzled, and worried.